EU: Economic Uncertainty Continues

Uncertainty about the economic predicament in Greece continued Feb. 5, despite the European Commission's positive review three days earlier of Athens' deficit-curbing plan, which had briefly instilled confidence in the Greek economy. Prices of credit default swaps — essentially insurance policies against possible default on government debt that are traded by investors — increased to record levels for both Greece and Portugal on Feb. 5, indicating that investors are asking higher prices than ever to insure government debt. The dire economic situation in eurozone economies that are running large deficits and facing investor scrutiny — Portugal, Ireland, Italy, Greece and Spain (PIIGS) — has put the entire monetary bloc under the microscope. Greece and Portugal are seen as canaries in the coal mine that could trigger crises in confidence in other eurozone economies, starting with Spain, Italy and Ireland and then moving on, possibly, to Austria, Belgium and even France. Rumors of a potential EU "bailout" of Greece — by funneling extra EU funds through existing programs or by more exotic means such as fielding an EU-wide eurozone bond despite explicit rules prohibiting it — have been circulating over the past two weeks. The scrutiny leveled at Greece and Portugal, however, is not completely rational. The Portuguese parliamentary vote on a law addressing the transfer of local financing — on any other day a nonevent — received an inordinate amount of scrutiny from financial media on Feb. 5 as investors looked for the "next sign" that apocalypse was coming to the PIIGS. Meanwhile, negative news about the performance of Austrian banks and the fact that Belgium needs to raise 89 billion euros ($121.6 billion) in 2010 alone — the largest loan figure on the entire continent and nearly a quarter of its gross domestic product — have somehow slipped through the cracks. (In the interactive graphic below, we take a look at the usual suspects and the three countries most likely to suffer after the PIIGS. We also explain key economic indicators that are informing international opinion about their economic performance.) (click here to view interactive table) The point is that, while Greek fiscal problems are severe, nearly all other eurozone economies face a combination of budget deficits and general government debt that could invite investor doubt. This puts the bloc's leader and economic heavy weight, Germany, in a predicament. It needs the markets to stop factoring in some "magical bailout" that is not written into the EU treaties. The best and simplest way to do this is to let Greece implode. The ultimate question, however, is whether Germany will choose fiscal prudence — and all the political and financial fallout such prudence would involve — over political prestige.