Greek Rescue Approved- But Europe Not Out of the Woods

Greek rescue

Today Europe finally reached a Greek Deal. Yet, doubt remains over whether Greece will be able to meet the terms of the accord and what the future holds for the euro zone.

The finance ministers agreed to the long-awaited 130 billion euro ($170 billion) deal that would start to reduce Greece’s debt to 120.5% of GDP by 2020. Private sector creditors will take a write-down on their Greek bonds of 53.5%. In return for the new cash, Greece signed up for cuts in pensions, minimum wage, health-care and defense spending, sales of assets and layoffs of public sector employees. However, even with this latest agreement, concern exists that Greece will not be able to meet its future commitments.

The Greek economy shrank by 7% in 2011, 5% of which was in the last quarter. Analysts expect further declines of at least 4% in Greek GDP in 2012 due to the required austerity programs. These structural reform measures, on top of Greece’s already 20% unemployment, will only deepen Greece’s recession. To make matters worse, businesses are not investing in Greece’s future until the euro is secure. Suppliers are not extending Greek firms credit, which is worsening the current liquidity shortage.

Elsewhere in the euro zone there are glimmers of hope. According to the Economist, Ireland has regained competitiveness, Spain’s new government has been able to reform long rigid labor laws, and Italy has passed a pension reform and is soon to propose labor reforms of its own. Yet, austerity in the short-term causes more unemployment and reductions in spending and GDP. Italy, Spain and Portugal are all expected to see a sharp drop in GDP in 2012.

By the end of February, European leaders are expected to agree on a new, higher “firewall” for euro countries that get into financial trouble. A permanent 500 billion euro ($650 billion) fund, the European Stability Mechanism is expected in July. This could bring much-needed momentum to the euro zone.

Yes, Europe has reached a Greek deal. Yet, the road to recovery for the euro zone will still be long and hard.

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