Greece deal brings relief, but the euro zone has much left to do in stabilizing itself

After a long night of negotiations, European Union leaders have brokered a deal to reduce Greece's debt and hopefully stem the continent's lingering debt crisis. The deal is a major move forward, but it is still only one step in restoring stability on a continent beset by economic woes.

The 10 hours of talks resulted in EU leaders agreeing on a number of measures aimed at addressing the euro zone's broad problems. The package targets cutting Greece's debt substantially, with private holders of Greek debt taking a voluntary 50 percent "haircut," receiving only half of what they are owed. The agreement also greatly expands the European Financial Stability Facility, the euro zone's fund for bailing out troubled countries, from 440 billion to 1 trillion euros.

Banks are also expected to raise additional capital, both to cover losses on sovereign debt and show that they can survive future shocks.

"Because of the complexity of the issues at stake, it took us a full night. But the results will be a source of huge relief worldwide," French President Nicolas Sarkozy told reporters, according to the Associated Press.

Indeed, there was an almost audible sigh of relief in global markets.

European stock markets rallied, led by the banking sector. Stateside, the Dow Jones Industrial Average shot up 250 points shortly after the opening bell.

The EU deal is a sign of substantial progress, but the larger European crisis is still far from over, says Benn Steil, senior fellow and director of international economics at the Council on Foreign Relations.

"This is the 14th euro zone leader summit in the last 21 months, and there are going to be many, many more over the next 21 months. So this is not the endgame by any stretch of the imagination," he said in a conference call.

Broadening the scope from Greece to the entire euro zone is a reminder that it is not just the size of a state's debt but the size of its GDP that is important in this crisis.

Spain and Italy are the two prime examples of larger economies dealing with heavy sovereign debt. "Obviously Spain and Italy are the main concern in all of this. Obviously Greece is the biggest problem country at the moment, but in the scheme of the size of euro zone, it's miniscule," says Howard Archer, chief European and U.K. economist at IHS Global Insight. "But obviously all along it's been the concern over Spain and Italy that has been the increasingly worrying feature for the euro zone. And obviously a lot of these measures that were adapted last night were aimed very much at putting a firewall around Italy and Spain," he says.

With debt at 120 percent of GDP, Italy is a particular worry to the European economic community. In an attempt to reassure EU leaders of his commitment to fixing Italy's debt problems, Italian Prime Minister Silvio Berlusconi wrote a "letter of intent" to EU leaders outlining plans to boost his nation's growth and cut its debt, including sales of public assets, making it easier for employers to lay off workers, and raising the retirement age from 65 to 67 by 2026.

However, considering Berlusconi's domestic political problems including numerous sex scandals, not to mention deep divisions over his retirement age proposal, some international watchers are skeptical of his commitment to reining in debt.

"If you're in Italian leadership, if you're a politician in Italy, you've got to respond to the realities of Italian politics," Sebastian Mallaby, director of the Maurice R. Greenberg Center for Geoeconomic Studies at the Council on Foreign Relations, said on Thursday's call.

Even if the continent settles its debt woes, economic growth remains a longer-term worry for many EU countries. Germany, the largest European economy, earlier this month cut its 2012 growth forecast from 1.8 percent to 1 percent. And with governments pulling back on spending to deal with their debt, that could further impair economic growth in the months and years to come.

 

 

 

Copyright 2011, U.S. News & World Report