Missed targets cast doubt on Europe's recipe for Greece
Greece’s admission that it is likely to miss targets to slash its deficit over the next two years has heightened fears of a default and raised concern that the country’s harsh austerity cure may be doing more damage than good.
Ill tidings from Greece have added fuel to the fire that is consuming stock markets in the eurozone.
Shares on Europe’s leading markets resumed their downward slide on Monday, a day after Greek authorities acknowledged they would fail to meet deficit-reduction targets for 2011 and 2012. Benchmark indexes in Paris and Frankfurt fell more than 2%, dragged down by banking stocks.
In a statement published late on Sunday, the Greek finance ministry said it was now tabling on a 2011 deficit of 8.5% of GDP, an improvement on last year’s 10.5% but still well in excess of the 7.6% the European Union and the International Monetary Fund were hoping for.
It hardly came as a surprise. “We already knew that Greece’s deficit over the first eight months of the year had reached €18.1 billion euros, well above the government’s 12-month target of €16 billion,” said Céline Antonin, a Greek specialist at the Paris-based OFCE, in an interview with FRANCE 24.
“What’s new is that Greece has officially acknowledged the failure of its strategy to bring the deficit down,” argued Benjamin Carton, an economist at the CEPII in Paris.
According to Carton, Greece’s admission will stir market fears of a looming default, “in turn driving down the share price of anyone involved with the Greek economy”.
This means Europe’s leading banks, which hold a significant share of Greece’s sovereign debt, will continue bearing the brunt of the market onslaught.
Indeed by noon on Monday, shares in French banks BNP Paribas and Société Générale were both shedding more than 6%.
But bank traders are not the only ones fretting. Greece’s shortcomings have also cast fresh doubt on the eagerly-awaited payment of a new tranche of bailout cash from the IMF and the EU. “The IMF is loath to lend money to countries who fail to honour their commitments on deficit reduction,” said Carton.
Echoing his views, Antonin warned that the bad news from Athens would bring “grist to the mill of those who argue against helping out Greece”.
On Monday, the “troika” of inspectors from the EU, the IMF and the European Central Bank duly said it needed more time to decide whether Greece should get another €8 billion in bailout cash, without which the country will most likely go bankrupt next month.
According to Carton, Greece’s European partners would be advised to use the extra time to review their entire approach to Greece’s debt crisis.
“Greece’s failure to slash its deficit has shown that Europe’s approach was flawed from the start and that it is time to change course,” he told FRANCE 24.
The French economist blamed the steep budget cuts prescribed by Brussels and the IMF for plunging Greece into a recession that has crippled its revenues and hampered its efforts to plug the deficit.
Carton said the real question was not whether Greece would go bankrupt, but rather when and how it would. Indeed, he added, the priority for Greece’s European partners should be to ensure that such a bankruptcy is managed in an orderly fashion.
“A chaotic bankruptcy will only serve to amplify the market hysteria and thereby increase the risk of contagion to other countries,” he said.
But for Céline Antonin of the OFCE, misguided austerity plans may well ensure such contagion takes place anyway. “Other countries, such as Portugal and Italy, have already adopted drastic austerity plans and there is no reason to think they should work any better for them,” she warned.