European Union finance ministers are pressing the indebted and riot-prone Greece to embrace a massive austerity plan and plug its debilitating deficit. But with many skeptical and little appetite for more bailouts, there are deepening concerns that a Greek meltdown could deal a severe blow to the idea of a common currency and set off a domino effect through Italy, Spain and Portugal.
On Tuesday, some EU leaders said they were confident Greece would pull itself out of its debt crisis under a plan submitted by Prime Minister George Papandreou, who promises to cut expenditure and tighten the country’s notoriously leaky tax system.
Spanish Finance Minister Elena Salgado – whose country holds the rotating EU presidency – said she was “not worried” that Greece will default, but refused to discuss the possibility of a bailout if Greece fails to make debt repayments, fears that have sharply raised its borrowing costs.
A bailout would be a first for the eurozone, which now looks vulnerable and faces unpopular measures such as budget cutbacks and higher taxes.
Other governments were less sure and reluctant to pay for Greece failing to manage its debt.
Dutch Finance Minister Wouter Bos said the Greek plan is based on vague one-offs “needs to be more substantial.”
Market experts are also skeptical that Greece can make the necessary cuts. BNP Paribas currency strategist Ian Stannard said investors believe they “lack detail and in some respects appear unachievable.”
Stannard cited the risk of investors losing their appetite for Greek bonds, 70 percent of which are held by foreigners.
“If foreign investors from outside the eurozone start to turn their back on Greek assets, this will have a significant negative impact on the euro,” he said.
Bigger, better-off countries would be faced with leading a bailout, but it’s not certain that their leaders, or voters, would agree. Other countries with heavy debt loads – Spain, Italy, Portugal – would have to pay more to borrow if investors flee government bonds because of Greece.
On Monday, the 16 countries that use the euro announced an overhaul of how euro nations coordinate their economies, with formal warnings for states that are running much higher inflation or average wages.
EU finance ministers will discuss Greece’s plan to reduce debt in February.
EU Economy Commissioner Joaquin Almunia said EU officials would monitor how Greece implements the reduction measures and seek the power to audit Greek statistics – which the EU says have been falsified under political pressure in the past.
It is uncertain whether Papandreou can push the proposed measures through in a country where many look to the government as a jobs provider and where political unrest can easily boil over into confrontations on the streets.
Greece’s two largest trade union groups are threatening strikes to protest the government’s efforts, which they say are unfair and target the poor. General Confederation of Greek Workers spokesman Stathis Anestis promised more strikes and called on the government to stimulate the economy rather than raise taxes that would affect those with low incomes.