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New Greek Plan the Same as Failed Old Greek Plan

One year ago the EU, ECB and IMF agreed a bailout of the Greek economy that led to borrowing costs doubling, two other euro zone members being bailed out and billions more being pumped into the system by Europe’s central banks.

In the last 24 hours reports of a similar plan have boosted the euro and led investors to bet a default on Greek debt will be averted. This confidence is misplaced according to Carl Weinberg, the chief economist at High Frequency Economics.

EU building flags brussels
EyesWideOpen | Getty Images
EU building flags brussels

“If the government and its opposition can accept the fiscal conditionality – and deliver the results thereof – then the EU and IMF can lend Greece money by the end of June, and default can likely be averted for now,” said Weinberg in a research note.

Given the infighting between the Greek government and main opposition over austerity, this is a big if and failure to achieve a deal could be very bad news.

“If the government cannot marshal the political will to achieve fiscal austerity, then all bets are off for the short term,” he wrote.

“What is being proposed to rescue Greece now is to give the government even more money and to demand even more fiscal concessions than the government was able to deliver in the last program,” said Weinberg.

Can German Growth Save the Day?

While the debt crisis has been playing out growth in the euro zone’s core economies has been strong, led by Germany. The problem is that growth could be about to slow, adding even more pressure to the already crisis ridden euro area.

“The euro-zone’s recent strength might suggest that the gloom-mongers have been wrong,” said Jonathan Loynes, the chief European economist at Capital Economics in a note to clients.

“There are good reasons to think that growth even in the core economy is set to slow. There are already some signs that the super-strong German recovery is starting to ease and the export sector will not be entirely immune to the strength of the euro.”

Throw in higher inflation and the prospect of tighter policy from the ECB and you could have a problem.

“Even if growth in Germany and the rest of the core remains strong, that may still do little to ease the periphery’s debt crisis. Indeed, by prompting the ECB to raise interest rates perhaps considerably further, and probably putting further upward pressure on the euro, strong growth in the core could even make the situation even worse” said Loynes.

“But if growth in the euro-zone does slow, that could wreak havoc with government’s deficit reduction plans, most of which rely on a return to reasonable rates of expansion,” he added.

“It could also cause problems in the some of the region’s housing markets and further destabilize the region’s banks,” Loynes said.

Contact Europe: Economy

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