Europe Economy

Euro Zone Deal Will Not Stem the Tide: Investor

The new rescue plan for Greece will not solve the long-term problems in the euro zone, analysts and investors told CNBC Friday.

Euro zone leaders, led by French President Nicolas Sarkozy and German Chancellor Angela Merkel, finally sealed a new rescue plan for Greece on Thursday. The new plan, which gives greater powers to the European Financial Stability Facility (EFSF), could push the country into default on some of its debt.

"Watching this, I have mental images of a kid trying to stop the tide getting to his sandcastle on the beach, and another shovelful of sand won't stop the tide coming in again," Jon Moulton, chairman of Better Capital and a well-known British investor, said. "It's all very well saying we will not let this lot go down. They could probably do that for Greece, but could they also do it for Portugal, Spain, Ireland and Italy?"

The deal was concluded after months of market worries that the trouble in smaller euro zone economies such as Greece would spread to the larger economies.

Key points of the package, which goes hand in hand with a second bailout for Greece, include lowering borrowing costs for everybody that uses the EFSF and giving it the ability to provide credit lines without formal application of restructuring.

"If you look at the euro zone as a single country, the finances look worrying already, to put it mildly. That will get worse with this," said Moulton. "This means the euro zone is forced either to get more fiscal integration and tough management, or that it will break up."

Banks in dominant European economies such as Germany have exposures to Greek debt, so a default by Greece could damage many outside its borders.

"Finally they are being proactive instead of just reactive," Valentijn van Nieuwenhuijzen, chief economist at ING Investment Management , told CNBC.

'Relief Rally'

European markets and the euro rallied on Thursday as news of the plan emerged.

"It’s a relief rally but not a massive one," said van Nieuwenhuijzen. "In the short term, the market will continue to congratulate the euro and bid it up."

But the single currency may come under pressure again, Peter A. Rosenstreich, chief market analyst at Advanced Currency Markets in Zurich, told CNBC.

"Long and medium term prospects for the euro are pretty dreary, as there are still problems built in that have not been addressed," Rosenstreich said.

The recent problems in the euro zone have led some to question whether the single European currency can survive the crisis.

The relatively strong euro is "hampering recovery" as exports from European countries remain expensive, according to van Nieuwenhuijzen.

"The euro was set up without the necessary political will to make sure that the members behave," said Moulton. "Until they do that, the euro will always be unstable."

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