'We're on a Slippery Slope': Will the Greek Bailout Destroy the Euro Zone?

SPIEGEL ONLINE

Large segments of the professional world agree with the euroskeptics' criticism. Hardly any economists are convinced that the planned injection of billions from European and German coffers can fix Greece's malaise. Even worse, many critics doubt that the rescue funds pledged to date are sufficient.

The Greeks will need to borrow about €130 billion by the end of 2012, when the loans under the current EU package mature. However, politicians had assumed until now that the country's financial requirements would not exceed €80 billion. But that amount would only be enough until the end of 2011, which would mean that Greece would have to raise the rest of the money in the financial markets.

That will be difficult. Leading economists don't believe that the risk premium on Greek treasury bonds will decline simply because the EU is now pumping money in Athens' direction. As a result, interest rates on Greek bonds will remain high -- meaning the Greek state will have to shoulder a large financial burden.

The European Union must therefore encourage the country onto a path of consolidation and reform, says renowned economist Martin Hüfner, so that it can repay its debts in a few years. "If this doesn't happen, the returns on the outstanding bonds will only grow," he says.

Little Confidence

Michael Heise, chief economist for the multinational insurance giant Allianz, agrees. "The EU's money will only help the Greeks in the short term" he says. "The key question is how the country will manage to get out (of debt)."

Not even Schäuble's own experts have full confidence in the European bailout package. They say that the high risk premiums in the markets demonstrate that investors have very little confidence in the European measures.

Two risk scenarios are currently making the rounds among economists. In the first scenario, Greece goes bankrupt and its loans are suspended, extended or restructured. In the second scenario, the country is forced to withdraw from the euro zone, enact a currency reform and hazard an economic new beginning. In both cases, large portions of the European bailout money would be lost.

Parallels are already being drawn to another historical showdown between governments and speculators in the early 1990s. At the time, hedge fund entrepreneur George Soros forced the Bank of England to its knees, and the British pound had to withdraw from the European currency system in place at the time.

Posted via email from Jim Nichols