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Europe

Europe's debt-ridden countries may be better off than assumed

A European Union summit on Friday is likely to see more arguments over whether to expand the euro-bailout fund. But how are the EU's worst debt-ridden countries doing one year after Greece's financial meltdown?

Euro symbol

Officials hope a bailout fund will fend off greater problems

Just a year ago Greece kicked off the European debt crisis. In March 2010, eurozone countries put together a rescue package for the heavily indebted nation, followed two months later by the European Stability Mechanism, essentially a euro-bailout fund.

Both European Economic and Monetary Affairs Commissioner Olli Rehn and European Commission President Jose Manuel Barroso support expanding the bailout fund, warning of indebted nations needing to issue even more new debt as old bonds run have to be paid off. In that light, they see the bailout fund as necessary to the stability of the currency.

"The intention of the bailout fund was to make clear to the financial markets: "Here comes the big club. It's not worth it to speculate on the peripheral countries because countries won't be allowed to fall into bankruptcy," euro-expert Jürgen Matthes of the Cologne-based Institute of German Economy told Deutsche Welle.

In order to bring this about, the bailout fund must be big enough. But there was doubt over whether the fund would be capable of providing a safety net big enough for countries like Spain. The fund totals 750 billion euros, but because a large portion of that must be deposited as guaranties, not even 440 billion are available.

Olli Rehn

Olli Rehn supports expanding the bailout fund

But such speculation is absolutely unnecessary, according to Wolfgang Gerke of the Bavarian Finance Center in Munich. He told Deutsche Welle it was "very dangerous when it is publicly discussed whether the bailout fund is big enough before it is even utilized. When this big fund is announced as a bailout, the pressure on these countries will decrease and they will be able to get by without any major bailout action."

Dynamic economies can absorb the crisis

The situation may not be as dramatic as some portray it. Italy did have to take on an extra 270 billion euros in debt this year, but the country's dynamic economy will help it come through fine.

Gerke said Italy has an economy that "is financed by very solid banks that have hardly been shaken by the crisis." Similarly Spain may have "big problems with real-estate credit in its savings and loans banks," but other Spanish banks have a "solid worldwide" footing.

Portugal, which lies in the middle of the debt-problem countries, successfully issued state bonds at an acceptable interest rate, Matthes said. However he warned that markets can react very sensitively, and whether Portugal's success could also apply to Spain or Greece is not yet clear.

"Little rumors, which often surface just before the day of bond auctions, can suddenly turn everything on its head," he said.

Not all political crises unsettle investors

Portugal's minority government has also been successful at weathering the crisis and building confidence among creditors.

Belgian flag

Political instability has taken a financial toll on Belgium

Much worse is the situation in Belgium, where the seven-months-and-counting lack of an elected government continues to wreak havoc on borrowing. Ireland's coalition has also collapsed, in large part due to the dismal state finances.

In Belgium's case, the economic crisis has had an inverse effect on politics: As financial markets get more nervous, pressure to unite politically increases.

"We'll see if the process of unification is accelerated by rising interest rates," said Matthes.

In that way, he added, the crisis can have a positive effect - which is also possible in Ireland, Greece and Portugal. The crisis may lead to structural reforms that ultimately help Europe become more competitive.

Author: Fabian Schmidt / acb
Editor: Andreas Illmer

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