In Europe, Stagnation as a Way of Life

For all the struggles that Greece has gone through to satisfy its demanding lenders, Europe’s troubles are not going away.

Demonstrators shout slogans during a protest against plans for new austerity measures on October 19, 2011 in Athens, Greece.
Milos Bicanski | Getty Images
Demonstrators shout slogans during a protest against plans for new austerity measures on October 19, 2011 in Athens, Greece.

Because of the various, often incremental, steps European officials have taken during the nearly three-year debt difficulties that began in Greece, the crisis fever has cooled considerably in recent months — including fears that the euro currency unionmight suddenly fall apart.

But crisis has given way to a grinding reality for Europe: economic stagnation and even, for much of the Continent, the specter of another downturn less than three years after the last recession ended.

Greek leaders on Thursday agreed to a new set of tough austerity measures, in hopes of receiving a new 130 billion-euro bailout package from the European Union and International Monetary Fund , aimed at avoiding a debt default in March. That agreement, though, is in some ways a microcosm of Europe’s broader quandary, as similar measures are being embraced by other debt-saddled countries in the euro currency union, including Portugal and Ireland.

Many analysts say the belt-tightening can only push those and other nations further into recession, sap the economies of their European trading partners and do little to address the systemic weaknesses plaguing Europe’s banks.

“We take one problem off the table for the moment,” Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., said. “That still leaves us having to deal with the dramatic destruction of wealth that has taken place.”

Markets have recently taken a more optimistic view of Italy and Spain — the nations where Greek “contagion” has long been feared to strike next, with even more dire regional consequences. Lately, both governments’ borrowing costshave come down to more sustainable levels. Under new political leadership, Rome and Madrid are proceeding with restructuring plans intended not just to reduce high debts and deficits but also to lay the foundation for eventually restoring economic growth.

Investors have also been reassured by the European Central Bank’s moves to lower interest rates and open the money taps to protect banks from being pushed to the wall.

“I don’t see what’s on the horizon that would derail this,” said Stefan Schneider, the chief international economist at Deutsche Bank in Frankfurt. “We are no longer in an environment where markets want to pick off Greece and move onto the next country.”

For Nicolas Véron, senior fellow at the Breugel Economic Research Institute in Brussels, that means Europe may be able to breathe easier, at least for a while. “It doesn’t mean the problems are solved,” he said. “But it removes some of the short-term pressure, and hopefully can create a virtuous circle.”

It all depends, though, on how the euro zone’s economy fares in the months and years ahead. Investors who once criticized countries for not embracing enough austerityto mend tattered balance sheets have recently started to acknowledge that too much austerity is squeezing growth — making it harder, rather than easier, to pay back debts.

And the growth divide that already existed between wealthy northern countries and those along the southern rim has widened even more in the last year, while those toiling in what is likely to be a drawn-out recession — Greece and Portugal especially — seem to be creating a third, ultraslow zone in the euro zone.

Those weak economies will weigh on Europe for years to come. They are already helping to weaken growth in Germany and once-robust countries like France, both of which are seeing their exports to other European countries suffer.

And if Greece were eventually to see no exit from its downward spiral and decide that it had no choice but to quit the euro zone — something analysts still do not rule out, even if Athens gets this near-term bailout — all bets are off.

“There would be contagion all over again if there is renewed talk of a Greek exit,” Mr. Véron said. “This will be a big theme to watch out for in the coming months.”

Serious doubts remain over Greece’s ability to revive its economy and generate enough growth even to reach the goal of reducing its debt load to 120 percent of its annual economic output in 2020 — a target stipulated by the European Union and the monetary fund.

Greece’s debt is currently 142 percent of gross domestic product. And Greek unemployment hit 21 percent in November, while industrial production plummeted 11 percent in December.

And while Greece will benefit from a debt revamping that reduces its interest rate burden in the years ahead, it is unclear how a country that has always depended on a state sector to help spur demand will be able to grow with its main economic engine effectively shackled by the budget cuts Athens is now promising.

Greece has a poor record of keeping its promises so far, raising the risk that it will not be able to meet the most recent conditions either.

“At the bottom of all this Greece still has to deliver,” Mr. Weinberg said. “As we saw with the first package, delivering the legislation doesn’t necessarily deliver the performance. Greece could be out of compliance very quickly.”

What’s more, the eventual terms of Greece’s bailout deal could lead to a new set of regional uncertainties.

So far, the European Central Bank is resisting calls to help secure Greece’s bailout by sending the profit from any of its Greek bond holdings toward a reduction of the nation’s debt. But if the central bank caves, Ireland, Portugal and the other countries that have received crisis bailouts might ask for the same treatment.

As part of Greece’s bailout deal, moreover, banks may agree to take up to a 70 percent loss on their holdings of Greek bonds. That is something Ireland and Portugal have said they want to avoid demanding of their own private creditors, so as not to frighten off investors when those countries eventually start borrowing in international markets again.

But that stance is not so popular with citizens. Enda Kenny, the Irish prime minister, said this week that, unlike the Greeks, he had no plans to press losses on banks holding Irish sovereign debt. Such talk has inflamed many Irish taxpayers, who have had to shoulder the banks’ bad debts.

If Ireland asked for write-offs from lenders like those for Greece, it could pave the way for similar demands from Portugal and perhaps larger debtor countries like Spain and Italy .

“The Pandora’s box has been opened for Ireland and Portugal,” and possibly for other countries, Mr. Weinberg said. “We don’t know where this goes.”