EU Debt Crisis: Austerity measures fail as €15bn black hole is found in Greek economy
International debt inspectors added salt to Greece’s financial wounds when they announced that the debt-ridden country must find an extra €15 billion to plug a “black hole” they have uncovered in the economy.
This comes even as Brussels announces its intent to ask the continent’s nations and state-controlled lenders to pitch in for pulling Greece out of its financial woes. The same day, the Irish government said it has trimmed growth forecasts, while the Spanish government directed the country’s banks to raise €50 billion more for protection against “troubled” assets.
Meanwhile, Greece is still negotiating a deal with creditors from the private sector for writing down its debts by some €100 billion. The latest announcement also goes to prove that the austerity measures adopted by the country’s banks, insurers and hedge funds would not suffice in averting a default. Greece is clearly in desperate need of financial help from sovereign creditors as well as the private sector.
Officials from the International Monetary Fund have warned that there is very little time left to finalise discussions that would secure Greece’s next tranche of the €130 billion committed as a bailout. Trimming expenditure, raising taxes and the overall pall of gloom created by the ongoing crisis have dragged Greece down into severe recession. This has offset whatever benefits the country had secured from the austerity measures.
When Chancellor Angela Merkel of Germany recently visited China, her discussions with premier Wen Jiabao had allowed some optimism to seep in as Jiabao assured that China could inject more funds into Europe. However, developments in countries most severely affected by the Eurozone debt crisis indicated that new problems are surfacing. Spain’s finance minister, Luis de Guindos, announced another consolidation round for banks by asking them to leave space for bad debts and write downs expected from the country’s realty market.
The Spanish economy is witnessing the second phase of a double-dip recession while unemployment figures stand at 23%. Spain’s economy minister said, "Spain's banking system will emerge from this process stronger, with fewer but more solid banks.” Many developers have defaulted on bank loans in Spain and the country has in stock 500,000 new homes still awaiting buyers. Banks have already made room for over 30% of the €176 billion in “troubled assets” on their books, according to the country’s central bank.
On the other hand, the Irish central bank cut its growth estimates for 2012 from 1.8% to just 0.5%, citing weakened consumer spending and poor export prospects amid the ongoing debt crisis. Taoiseach Enda Kenny rejected criticism that the central bank’s estimates did not match the government's healthier forecasts for the budget, stressing job generation to be the main area of focus. He said, "The government's growth figures are median figures and we are prepared to stand by those.”
This news is in no way surprising, and highlights the damaging effects of implementing severe austerity measures rather than increasing investment and focusing on growth. Greece’s problems within the Eurozone are increasing, and I would not be surprised if this crisis heralded the end for the single currency.