Last night European leaders debated on whether or not to
give Greeks the massive €130 billion bailout, they debated for 14 hours but
finally announced that they would give the Greeks the money. The markets
responded well to the news, but Greece is far from being in the clear. The
kindest estimate suggests that Greek debt will go down to 120% of GDP in 2020,
that’s eight years to get to an Italian
level of debt. Other projections put them at 140%, if things are bumpy and 160%
if things are bad. The 2020 estimates also include that the current level of
austerity is maintained for eight years, we’ve seen how the Greeks in Athens
reacted to the recent austerity bill. People would be mad to think that the
Greeks will take more austerity lightly; how far down the path of violence will
they go? It’s certainly a dangerous
situation that will probably get worse before it gets better. The approaching
elections will also cause nervousness amongst the creditor nations such as
Germany, the Netherlands and Finland as a new government could overturn the
austerity package and take default. It would be like Lehman’s brother crash all
over again, but the immediate result would be much more devastating for Europe,
especially the remaining PIIGS countries.
Cracks are also beginning to emerge in the creditor nations
over sticking to austerity. Members of Angela Merkel’s party are suggesting
that an alternative to austerity is required. The leader of France’s
presidential election is a socialist who wants stimulus, not austerity. Within
a year austerity could be replaced with stimulus and then maybe Europe could
enjoy American levels of growth!
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