Europe debate over bailout fund nears decision

October 6th, 2011

Greece announced that it will not be able to hit its projected deficit target for 2011 this past Sunday. In order to correct these problems, Greece has conjured up yet another austerity plan to further tighten the countries spending going into 2012.

According to The Wall Street Journal, Greece’s deficit this year, which is approximately €18.69 billion ($25 billion), is about €1.68 billion higher than the prjoected deficit. For 2012, Greece has set its sights on a deficit of 6.8 percent of GDP – roughly €14.65 billion.

These numbers came as no surprise to the global economy, though. Additionally, Greece’s reaction to the report also came as no surprise. The country yet again fell short of its intended goal and is implementing more new austerity measures.

It is important to note that global economists speculate further austerity will only push Greece deeper into recession. Nonetheless, the prime minister of Greece, George Papandreou, assured all in attendance at Sunday’s meeting. According to the Wall Street Journal, he said,  “I want to repeat that we will be unswerving in our goal: to fulfill all that we have promised to ensure the credibility of our country.”

German Chancellor Angela Merkel reacts during the debate about eurozone bailout fund at the German parliament Bundestag in Berlin, central Germany, Thursday, Sept. 29, 2011. Germany's lower house of parliament votes on plans to expand the powers of the eurozone bailout fund.(AP Photo/Markus Schreiber)

Although this is a promising statement, Greece is not alone in this battle. The rest of the EU must decide on a proactive stance.  And it seems the EU is starting to deliver.  Up until recently, the eurozone seemed to be complacent with Greece’s weakening condition.

But now the wealthier nations are making a stand. After all, the longer Europe waits to fix its problems, the worse the problem is becoming. The stronger nations of Europe are on board with the austerity route and providing the bailout.

But experts say austerity is not the key, growth is. Jean-Paul Fitoussi, professor of economics at the Institute of Political Studies in Paris, told The New York Times, “If there is no consumption, no reason to invest, difficulty in accessing the credit market, where is the growth? The only engine that is functioning in this view is the engine of depression, and this will worsen the sovereign debt and deficit problem.”

He went on to say it is true that austerity and recession will eventually lead Greece to a stable economy.  However, it is nearly impossible to do it in the time Europe plans on. If the eurozone collectively continues with these austerity measures Fitoussi says France will most likely also fall into recession.

Two of the wealthier nations that are on board with the bail out are Germany and Finland. The New York Times reported  late Sunday Chancellor Angela Merkel of Germany rejected allowing Greece to default.

The chancellor warned the fallout would have simliar consequences to the Lehman Brothers Holdings Inc. bankruptcy in 2008 – the largest bankruptcy in U.S. history at $600 billion. Finland, on the other hand, has taken a much more cautious path. The Times also reported that Finland is demanding it receive collateral from Greece before they donate any aid to the struggling country.

Nonetheless, Europe seems to be making a firm decision; something the global economy is not used to.