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Greece's Problems Spark Euro Zone Woes

  • Lisa Bryant

The European currency, the euro, is facing one of its biggest tests of its decade-old existence. The fiscal woes of euro zone member Greece are sparking fears in the financial markets that Athens will default on its debt - and concerns about other weak euro economies.

The euro fell sharply again on Friday, hitting its lowest level against the dollar since last May. Much of the concern in financial markets has been centered on Greece, which is struggling to curb a soaring deficit amounting to 12.7 percent of its Gross Domestic Product (GDP).

Earlier this week, the European Commission approved the Greek government's austerity plan. But EU Economic and Monetary Affairs Commissioner Joaquin Almunia warned Athens faced an uphill battle in implementing it."

"This deserves support but at the same time we need to strengthen our instruments [on] how the program is monitored, so as to avoid any slippages, to avoid that the objectives not be reached," said Joaquin Almunia.

Those words have not been enough to ease investor fears that Greece may default on its debt. They are also worried about other weak economies in the euro zone - notably Portugal and Spain, which also have ballooning deficits. Some analysts have even speculated that the euro zone risked breaking up - although most believe the 16-member monetary union will survive.

Philip Whyte is senior analyst for the Center for European Reform in London.

"I think that the current strains in the euro zone are certainly the most serious which have existed since it was set up and now we're going to find out whether a single currency is viable outside a political union," said Philip Whyte.

Whyte says Greece's plight will test whether other eurozone members in better economic shape - such as Germany and the Netherlands - are prepared to bail out Greece. Some analysts predict Greece could be pushed out of the bloc. Also unclear is whether the Greek government will have the political will to carry out the painful fiscal measures it promised -- particularly if they spark protests.

Spain also faces potential social unrest over its austerity measures. And in Portugal, the parliament on Friday voted down the government's austerity plan.

Whyte says its unclear how the euro zone's problems will unfold in the coming weeks and months.

"But I think this problem can't be allowed to fester," he said. "The lesson of these sorts of crises is that the longer they're allowed to fester, the less confidence markets have that the problems will be resolved."

The Greek government has vowed to cut its deficit to 3 percent of GDP - the euro zone cap - by 2012.

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