Plan B for Europe

Washington Post
Editorial
May 16, 2011

Don't look now, but Europe’s plan to bail out Greece isn’t working. A year ago, the European Union’s more solvent countries assembled a $160 billion package, two-thirds of it from them and a third or so from the International Monetary Fund (IMF). The idea was to help Greece make payments on its national debt, now equal to about 150 percent of gross domestic product, while Athens enacted budget cuts and other structural reforms. In theory, this would enable Greece to resume growth, pay its debts and regain access to private credit markets.

But Greece uses the common European currency, the euro, and therefore cannot devalue its way to greater competitiveness, as other countries facing similar debt crises have done. Unemployment has risen to 15 percent but without significant improvement in the nation’s ability to pay debt. Greece has failed to meet its deficit reduction targets and probably needs $80 billion-plus to make it to 2014. Investors are demanding 25 percent interest on two-year Greek bonds, which shows that markets are betting on “restructuring” — a polite term for default.

Given that Ireland and Portugal face similar problems and Europe’s major banks are massively exposed to the debt of all three, it is also clear that Europe’s efforts have not been enough to banish the specter of a wider financial crisis.

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