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Greek bailout

February 10, 2010

The ongoing economic woes of European Union member Greece have shaken the euro zone and have prompted Germany to consider a rescue package to help Athens out of its bind.

A life ring in German colors wrapped around the Greek flag
Greek economic stability is now relying on EuropeImage: Bilderbox / DW / Montage

Day-long strikes have hit Greece as Germany says it is considering how it can help Athens deal with its huge budget deficit. The country's economic woes are threatening to destabilize the euro currency.

Greece is currently struggling with a budget deficit of 12.7 percent of gross domestic product - more than triple the maximum deficit allowed by European Union regulators.

The fear is that if Greece's problems aren't nipped in the bud and the country's economy defaults because of its debts, this could seriously affect some of the other debt-laden economies that share the euro currency, such as Portugal, Spain and Italy.

The Greek crisis has already led to an increase in borrowing costs for governments across Europe, and caused a rise in the risk premium on German bonds. It has also sent the euro currency sliding against the dollar.

The bailout risk

German Finance Minister Wolfgang Schaeuble
Schaeuble has been considering a German-led deal to help GreeceImage: AP

Cinzia Alcidi from the Centre for European Policy Studies told Deutsche Welle that this is an important reason why Berlin is thinking about lending Athens a hand.

"This is something that we all expected, because if there is a country that can help Greece it is Germany," she says. "The help would avoid a situation in which the euro zone could completely break down."

But she says there is still a risk in countries like Germany - Europe's strongest economy - bailing out their euro zone partners.

"On the one hand we have Greece in a difficult situation. To save the euro zone Greece should be helped," she says. "On the other side, you want to avoid a situation where other countries are not willing to implement the necessary adjustments and are just waiting to be rescued by other countries without making the necessary efforts to improve their (fiscal) conditions."

Germany's finance minister, Wolfgang Schaeuble, is believed to be working bilaterally and at the European level on putting together an aid package for Greece.

Just what any aid deal would consist of is still a matter of speculation, but a German government official told the Financial Times Deutschland it would be "more about finding firewalls, containing the problem, than principally about helping the Greeks."

More 'sense' in Brussels aid

The EU flag flies half-mast at EU headquarters in Brussels
EU leaders will discuss the Greece situation in Brussels on ThursdayImage: AP

Friedrich Heinemann from the European Centre for Economic Research told Deutsche Welle there is no doubt Athens needs help to prevent its huge deficit from becoming a European problem. But he says any aid should come with conditions attached.

"These conditions would be that Greece really has to provide cuts, budgetary cuts, which should be not only of a certain quantity but also of a certain quality," he says.

"Greece must grow. All the savings must spare the investment budget, because they are preconditions for further growth in Greece."

Heinemann says however that help should come from Brussels, and not from Berlin.

"The European Union is a community to a certain point, and there is no sense in single countries helping Greece, and no argument in this," he adds. "And besides that, the European Union, with the EU budget, has very nice instruments to impose sanctions on a country."

There'll be a special economic summit in Brussels on Thursday, where it's thought European leaders will draw up a clear EU response to the situation. Germany has set itself the task of helping to work out what that response should be.

Author: Darren Mara

Editor: Rob Turner