'EU Has Not Yet Faced the Whole Sad Truth About Greece'

Spiegel
February 22, 2012

At first glance, the euro-zone finance ministers' agreement on a new bailout for Greece seemed like a decisive step that would save the country from default. Politicians had no shortage of praise for the deal, reached in the early hours of Tuesday morning after marathon talks in Brussels.

The rescue package would "secure Greece's future in the euro area," said Luxembourg Prime Minister Jean-Claude Juncker, head of the Euro Group, while Greek Prime Minister Lucas Papademos described it as a "historic day for the Greek economy." The euro leapt in value in reaction to the news, climbing above $1.32.

But as analysis of the deal began, so did concerns over its effectiveness grow. Many observers see the rescue package's targets as overly optimistic. There are doubts that Greece will really be able to get back on track for growth and reduce its public debt from the current level of over 160 percent of gross domestic product (GDP) to the target of 120.5 percent by 2020. Similarly, many fear that the €130 billion ($172 billion) in aid that the package contains will not be enough.

There was more bad news about the Greek economy on Tuesday. According to a draft law posted on the parliament's website, the Greek government now expects the country's budget deficit to reach 6.7 percent of GDP in 2012, instead of the original target of 5.4 percent. The figure had been readjusted because of the "bigger than expected recession of the Greek economy," the draft law read, as quoted by Reuters. The news is likely to increase doubts as to whether Greece will be able to reach the long-term goals set down in the second bailout.

The size of the International Monetary Fund's contribution to the bailout also remains unclear. The fund has indicated that it wants to provide less than the one-third of the total it provided in previous euro-zone bailouts. IMF head Christine Lagarde said the board would decide in mid-March. It would, she said, take into consideration "additional matters such as the proper setting up of a decent firewall." The IMF wants the size of the euro backstop fund to be increased, something which Germany remains opposed to. EU leaders will discuss the issue at a summit in early March.

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