After Ireland: Who Will Be Next to Need a Bailout?

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Virginia Mayo / AP

The main square in Antwerp, Belgium

There was something depressingly familiar about the travails of the euro this past fortnight. The markets laid siege to a euro-zone member, Ireland, and — in a bid to settle the currency anxiety — a bailout package was agreed over the weekend. But now the markets have moved on. Earlier this week, it was Portugal under pressure, as borrowing costs soared on its debt. Investors then had Spain in their crosshairs, but by Wednesday, they had added Belgium and Italy to their list. Euro officials have emphatically insisted that no other country needs a bailout. But behind the scenes, they are watching the spreading contagion with apprehension. And what was once a taboo subject — the breakup of the euro zone — is being contemplated ever more openly.

How bad is it? Doom-laden warnings of a domino effect were also heard earlier in the year, as the euro zone pondered a bailout for Greece. The country's eventual rescue came with the creation of a shock-and-awe trillion-dollar bailout fund to help any euro-zone member that found itself in dire straits, and the move initially appeared to quiet the market's fears. The bailout fund can easily handle the $145 billion needed for Greece and the $115 billion estimated for Ireland. But if other nations put out the call for help, even a trillion dollars would be stretched: such an exercise for Spain alone would mean finding a whopping $570 billion, say analysts at Capital Economics. The looming possibility of serial European bailouts is, German Chancellor Angela Merkel said Tuesday, "exceptionally serious."

Calmer voices have tried to send out more soothing messages. French Finance Minister Christine Lagarde said Tuesday it was "out of the question" to dismantle the euro zone; European Central Bank (ECB) board member Erkki Liikanen said that the position of the euro was "not at all in question"; and E.U. Monetary Affairs Commissioner Olli Rehn called talk of dismantling the euro "irresponsible." But that has done little to prevent speculation. Consultancy firm Roubini Global Economics, led by fiscal Cassandra Nouriel Roubini, predicted a grim course for Portugal: "The script in the next few days and weeks in the markets will follow a similar pattern to Greece and Ireland — denial, more denial, E.U. confusion, market panic and a bailout," it said in a briefing note Wednesday.

Portugal certainly looks increasingly vulnerable. Like Greece and Ireland, it relies on the ECB to keep its banks afloat. Portuguese spreads are about as high now as the Greek spreads were ahead of the rescue. And market nerves were further strained Wednesday as Portuguese unions launched a general strike against the latest austerity budget — a move that, in turn, pushed the interest rate on the government's 10-year bonds through the 7% barrier. Analysts say a Greek-sized bailout is looking more and more likely. "Portugal has been weak for some time," says Jean Pisani-Ferry, director of Bruegel, a Brussels-based economic think tank.

But Pisani-Ferry warns that talk of contagion is misleading. "There might be a bailout of Portugal, but we don't need to think of a breakup of the euro," he says. "You have to address each situation on its own terms, and the markets have shown ability to discriminate between countries."

Indeed, the other supposedly tottering euro-zone economies seem to be in a different league. While Spain faces serious economic-growth and labor-market challenges as it works its way through a devastating real estate collapse, its debt was a relatively low 53% of GDP in 2009. Crucially, the Spanish government has launched radical economic reforms since the Greek crisis peaked in May, cutting spending and public wages, and liberalizing the Spanish labor market. According to Spanish Finance Minister Elena Salgado, there is "an abyss" separating her country from Ireland and Greece. "We have a solid financial sector. Austerity and reforms are producing exactly the results we forecast," she told Spanish radio on Wednesday.

Belgium is facing market pressures because its debt has just gone above 100% of GDP, and more than five months after its general election there is still no sign of a permanent government. And yet, although Belgium's overall debt is high, it rose only slightly during the downturn, and there are realistic expectations that it will fall again (and the country has proven its ability to cut spending, having already brought the debt level down from 140% of GDP in 1990).

As for Italy, it struggles with the familiar southern European problems of lack of competitiveness and an aging population, as well as a debt of 115.8% of GDP. But its banking system is healthier than those of many of its peers, and the costs of servicing Italy's debt are considered manageable.

A crucial factor in these cases is the nations' ability to correct themselves: across the euro zone, countries are taking extraordinary measures to restructure their economies and their finances. Once seen as impervious to reform, Greece has been cutting wages and benefits in the public sector since May. On Wednesday, just days after announcing that Ireland would seek a bailout, Prime Minister Brian Cowen unveiled plans to brutally slash public spending by $20 billion — or 20% — over the next four years.

Such reforms could secure the euro's survival, says Jacob Funk Kirkegaard, research fellow at the Peterson Institute for International Economics in Washington, D.C. "Despite the temporary market volatility, as long as the underlying health of the European economies is being aggressively addressed through the austerity and reform measures politically enabled by the economic crisis, speculative attacks cannot break the euro zone apart," he told TIME in an e-mail.

Over time, the painful reforms that countries all over Europe are putting themselves through may well calm the markets in a way that the Irish bailout has failed to do. But for the moment, the euro zone is living in jittery times.