How Deep Does Europe’s Trouble Run?

By Inya Ivkovic, MA — The Financial World According to Inya column

Last week, Greece’s civil servants staged another day of strikes and protests against the government’s desperate moves to reduce the debt load by imposing severe cuts on both headcount and wages. At the same time, Eurostat, the European Union’s (EU) statistics agency, recalculated Greece’s budget deficit for 2009 upward, from 12.9% to 13.6 %, only adding fuel to the already sky-high burning fire.
The country’s civil servants interrupted delivery of public services, closed schools, left hospitals with minimal and emergency staff, and even blocked Piraeus, Athens’ main port, and its ferry service. Favorite banner inscriptions read “Tax the rich” and “Don’t take the
bread from our table.” At times, tempers blew up and street brawls broke out, forcing police to tear-gas some 150 protesters.Greeks can scream all they want. Now that the International Monetary Fund (IMF) is involved, deep cuts are to be expected, while the European central bank is likely only going to nod its head in agreement. After all, neither the IMF nor the EU is going to let Greece’s three-year bailout package go to waste. Greece got the emergency money, in spite of all the moral disgust of the net savers, such as Germany. Only it is like no other loan the country took out
before. This time, there are serious strings attached.When Eurostat revised Greece’s deficit calculations, the country’s costs of borrowing also hit new highs. The spread between a 10-year Greek bond and a comparable German one widened to 5.29% from 5.03%, almost within minutes. As a measure of stability, such a gap
widening so quickly obviously indicates there is none in Europe now. Every country is a domino and, with the exception of Germany, every domino could fall hard and take the rest in the chain down with it.About a year ago, Greece dropped a bomb on its European partners, saying that the previous conservative government had left a much bigger mess behind and that socialists, who have subsequently taken over, could not have predicted the consequences of debt exceeding six percent of the total output. It appears the successor government is trying to fix as much as it can. And it is going the only route left, with tough cuts, accepting charity from its European partners, and IMF’s cookie-cutter solutions to fiscal problems”.How deep does Europe’s trouble run? Greece is staggering under unbearable debt load of 300 billion euros, or about $406 billion. Just this year alone, and just to keep afloat, Greece needs to borrow about 54 billion euros. Through to 2011, Greece’s national debt is expected
to reach historic proportions of 120% of the country’s total output. I don’t even know if this debt load can be paid off. Let’s just say that the trouble runs very, very deep.

Greece’s only real hope is to raise funds on its own. It will likely mean having to do what the U.S. did: auction truckloads of treasuries to foreigners willing or crazy enough to make a bet on Greece’s future in exchange for some level of control. Only, I cannot see Germany, for example, as willing to play the same kind of symbiotic role in this story with Greece as China is playing with the U.S. Unlike the U.S. and China, Germany and Greece’s relationship is a forced, artificial one, while the relationship between the U.S. and China is a deeply rooted, macroeconomic one.