Let's scrutinize them, starting with Greece, the most indebted, as well as the most rebellious to the Troika's austerity plans.
The Troika offered Greece a bailout loan worth 360 billion euros, an amount bigger than its gross domestic product (GDP), until 2014 as part of a very severe belt-tightening program that includes wage cuts, firings from the public sector, cuts in welfare spending and market reforms aiming to open protected professions, such as taxis drivers and pharmacists, to competition. The objectives were aimed at achieving a balanced budget and a competitive economy in 2014. Though George Papandreou's PASOK government had barely started to apply the austerity program, Greeks strongly resisted it, provoking two general elections within a year. Unsurprisingly, delays occurred in the implementation of the austerity program, and it is now clear that the budget deficit target of 5.4 percent for this year will not be reached.
Indeed, the problem is not with the delays, though each year of delay requires an additional injection of 50 billion euros, but the inability of Greece to implement the austerity program. The Troika is ready to allow for an extension of the program despite its cost, but not a compromise. IMF spokesman Gerry Rice, during a press conference last week, excluded any renegotiations but said that the fund was open to discussion “if there are ideas how to better achieve those objectives.” On Wednesday, officials from the government of Prime Minister Antonis Samaras will meet with Troika representatives with the hope of reversing some unpopular measures while the Troika will ask Greece how they plan to save 11.5 billon euros by 2014. I expect a political crisis -- another one -- since the Democratic Left (DIMAR) who barely supported Samaras' government and with the promise of loosening austerity measures, will probably break with it.
Portugal has been considered, until recently, the model student of austerity programs, but this might be a bygone era. The center-right government of Pedro Passos Coelho had already cut wages and spending on over-indebted hospitals and had aimed to achieve a budget deficit of 4.7 percent, which was close to 10 percent in 2010. But like in other similar cases, the Portuguese economy will contract more than expected, and the austerity measures already in place will not be sufficient. But what is really new in Portugal is the increasingly popular resistance to the austerity measures. Doctors went on a two-day strike last week. Moreover, the constitutional court canceled the public sector wage cuts, arguing that they conflict with the principle of equal treatment. The government responded by saying it would proceed to cut wages in the private sector as well.
Another model student, along with Portugal, was Ireland. Following the collapse of its banking system because of mortgage madness, the Irish state had an abyssal budget deficit of 30 percent. The Troika provided Ireland with 85 billon euros, approximately half of its GDP, in bailout funds as part of a drastic austerity program with the same belt-tightening measures as Greece. The austerity measures were so drastic that the deficit decreased by 10 percent, though the public debt to GDP ratio was still increasing; it is expected to reach 120 percent in 2013. But the bad news is that the growth prospects of the Irish economy are bleak because of the European recession as it is heavily dependant on exports. Currently, the Irish are getting ready to ask for the same privileges that are accorded to Spain, who is facing similar difficulties -- a banking system that is about to collapse under the burden of unpaid mortgages. Recently, German Chancellor Angela Merkel was obliged to accept that European funds had to be used directly to support Spanish banks in order to avoid further increases in the sovereign debt, so the Irish demands are perfectly legitimate.
The case of Spain is well known as it has been on the front pages over the past few weeks. The center-right government of Mariano Rajoy came to power promising sweat and pain, but his homemade austerity program faces an increasing resistance, and it is uncertain if they will be successful given a more severe recession than was expected. The short-term debt of Spanish banks with the ECB has already reached 340 billon euros, and experts say more will be needed. The Spanish sovereign debt interest rates are around 7 percent, showing the weak confidence of financial markets. Obviously, the situation cannot last.
The case of Italy differs on two important fronts. It is colossal, and it has the second biggest public debt after Greece, but it has a low budget deficit (less than 3 percent). Despite this, it faces, like others, very bad growth prospects. The IMF forecasts a 1.6 percent contraction of its GDP this year. Prime Minister Mario Monti succeeded in enforcing some structural reforms, but these need time to help growth and it is also unclear if they will be sufficient, as noted by Moody's. The rating agency downgraded Italy by two notches last week, from A3 to Baa2, arguing that Greek and Spanish risks had increased and were contagious.
Let me finish this parade of facts and events with a very symptomatic one regarding future possible developments in the eurozone: Finnish Finance Minister Jutta Urpilainen declared that “Finland would consider leaving the eurozone rather than paying the debts of other countries in the currency bloc.” And Monti responded to her by saying that such “irresponsible sentiments push up Italian interest rates.”
