by Elias Papaioannou and Dimitri Vayanos
Bloomberg News
August 11, 2011
The crisis in the euro region is spreading to Italy and Spain, triggering emergency purchases of those countries’ bonds by the European Central Bank.
Further ECB support is likely to be conditional on progress by those nations in fulfilling pledges to accelerate fiscal consolidation and carry out structural reforms.
But can Italy and Spain succeed in overhauling their economies, and how should institutions such as the ECB and the European Union help catalyze change? Some answers can be found by examining the pitfalls exposed by the rescue of Greece, where the problems are the most acute.
The bailout plan adopted by the Athens government more than a year ago is failing to meet some of its central objectives. The country is grappling with a deeper-than- expected recession, which has been aggravated by a credit crunch due to banking-sector problems. Tax revenue, meanwhile, is below target, and progress on structural reforms has slowed. More worrisome, polls showed that an overwhelming majority of the population favored the plan initially, but support is now below 25 percent.
That public backing, which is a necessary condition for success, is vanishing for several reasons. The recession and austerity measures are perceived as evidence that the plan is failing. And the lack of progress in carrying out structural reforms is causing the rescue to be associated with the government cutbacks, which are primarily hitting the poorest. That adds to the existing feeling of injustice: High-profile corruption cases involving politicians and well-connected businessmen haven’t been prosecuted, and tax evasion is still pervasive and in plain sight.
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