Can the Crisis in Greece Be Contained?

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Anger Three died when protesters laid siege to this Athens bank on May 5

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Both Portugal and Spain also suffer from anemic growth in Portugal's case, lagging behind the E.U. average since 2002. For Spain, which thanks to its ill-founded housing boom was not long ago experiencing growth rates that neared 4%, the drop has been dramatic: its economy continues to contract, making its recession the most enduring among euro zone states. But even as projections suggest its numbers will finally if barely move into the black in 2011, there is hardly enough consensus to make them reassuring. "Whether we see a slight contraction or a slight rise, the problem is that the Spanish economy is in for a prolonged stall," says Ballabriga. "And that's what is so worrying. When you put all the pieces together, you have a highly indebted country whose possibilities for generating revenue are fairly deteriorated. So it's going to have problems servicing its debt."

Spain's crippling unemployment rate the highest in the euro zone is only making things worse. When Spain's housing bubble burst, it took millions of jobs with it, and they have yet to be replaced. As long as unemployment remains high, it's going to be hard, if not impossible, to reduce public debt both because of the high cost of unemployment benefits, and because the more than 4.6 million who are out of work aren't generating the income in the form of taxes the government so desperately needs.

Add to that the nervousness of the markets, and the chance of dominoes falling just increases. "By itself, Spain isn't at risk of defaulting on its sovereign debt," says Alfredo Pastor, an economist at the University of Navarra's IESE business school and former deputy Finance Minister. "But the market isn't always rational. If Portugal should fall, the market would say that the problem is southern Europe, and then both Spain and Italy would be at risk." As if to prove his point, on May 4, both the Spanish and Portuguese stock markets fell around 3% amid unfounded rumors "complete craziness" as Prime Minister José Luis Rodríguez Zapatero put it that Spain was about to request a bailout.

Which is why MIT professor Simon Johnson, former IMF chief economist, says no one should wait. "Portugal is the firebreak," he says. "If I were Spain I'd be working really hard to get a preventative package in place for them." It's not hard to see why; Portugal, like Greece, is a small economy. But Spain, the world's eighth-largest economy and the contributor of 12% of the E.U.'s GDP, would require a bailout the like of which has never been seen before. As Pastor says, "They would have to come up with a new kind of measure. And I have no idea what that would be."

No Quick Fix
Every crisis is an opportunity, of course, and there are plenty of observers in Spain who see a chance to engage in the thoroughgoing reform that has been lacking hitherto. The solution to its level of debt, they argue, is not simply fiscal austerity though more of that, which Spain has thus far been lax in enforcing, is surely warranted: the government is also going to have to reform its financial sector, loosen the rigid labor market that impedes economic growth and encourage new investment from foreign sources. "If they can improve things within all these areas, they can save themselves," says economist Ballabriga. "But it has to be all of them, and it has to be now. In a few months, it will be too late."

In Greece, similarly, there are those who think the bailout may turn out to be a blessing, one day. In agreeing to the euro-zone and IMF terms, the government has pledged to trim its tangled bureaucracy, tackle tax evasion and reduce waste all measures aimed at helping to stimulate the economy and offset the impact of the austerity measures. "The important thing now is strict implementation, capacity-building in the state sector and tax administration, and trying also to make a clear impact on tax evasion," says Jens Bastian, a German political economist at the Hellenic Foundation for European and Foreign Policy. "This is something that goes beyond financial assistance. This is about a mentality change in Greek society, a cultural revolution in the relationship between citizen and state."

Is Greece ready for that? If so, the curious case of the Greek debt will turn out to be no more than a footnote to the history of the Great Recession. If not, and bailout follows bailout until there are defaults on sovereign debt galore, that word recession may yet have to be replaced with one that sounds similar but begins not with an R, but a D.