Keeping the Greek economy from sinking the eurozone

The World

Story from PRI's The World. Listen to audio for full report.

Following weekend meetings at the headquarters of International Monetary Fund in Washington, there was speculation Monday about new proposals for keeping the failing Greek economy from sinking the eurozone.

Those proposals reportedly include slashing Greek debt in half, and pumping up Europe's bailout fund to more than $2.5 trillion dollars.

But on Monday, politicians in Brussels downplayed those reports, saying that increasing the size of the eurozone's bailout fund was "not on the table."

As for the idea of letting Greece cut what it owes by 50 percent, some question whether that would even do the trick. "The markets have moved on. They've assumed Greece has defaulted, and that's the end of that," said Pippa Malmgren, founder of Principalis Asset Management in London.

"The critical issue is — what about everybody else? The market is focused on the fact that a default in Greece will reveal losses among the financial institutions in other European countries, and possibly even in the US and Asia."

Malmgren said that in Europe, the Italians, Spanish and Portuguese don't have enough money to save their banks from overexposure to Greek debt and possible default. If Greece goes down, so do those banks, and possibly those countries. That's why markets have been waiting for some sign that European leaders were willing to take bold action to stop possible economic contagion from spreading.

"The question all along here has not really been one of economics," said Peter Spiegel, Brussels Bureau Chief for the Financial Times. "Let's be honest. This has been a crisis of politics, a crisis of leadership."

Spiegel added that in Germany, there's a belief that Greece is small enough, on an economic and a banking system level, that it can be contained. "But here in Brussels, there is a real concern that the contagion is not containable."

The question remains whether boosting the Eurozone's bailout fund would help to ease fears and stop the contagion. Perhaps, but such a move would require the approval of all 17 members of the Eurozone, and in Germany, there is growing opposition to any more bailouts.

Markus Kerber, a finance professor at Berlin Technical University, who leads a group he calls "the coalition of the unwilling," said it's now high noon for the German taxpayer.

"And not just them, but for the taxpayers of all the other donor countries, to force their governments to put an end to an unstrategic bail-out policy," Kerber added.

For now, though, it's all just talk. Three countries, including Germany, have yet to approve the last bailout deal reached earlier this year. Amid the uncertainty, Europe's banks are hesitant to lend money, businesses aren't investing, and consumers aren't spending money, said investment banker Ralph Silva.

Read the rest of this story on The World website.


PRI's "The World" is a one-hour, weekday radio news magazine offering a mix of news, features, interviews, and music from around the globe. "The World" is a co-production of the BBC World Service, PRI and WGBH Boston. More about The World.

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