Fiscal tightening in Greece, Spain and Portugal might spread to Italy, France and Germany, Mr. Annunziata said, in an effort to prevent a general rise in long-term yields that would make debt financing costlier. This tightening could slow growth, though the weakening euro would take up some of the slack by boosting European exports.
The runup of debt in the euro zone has been phenomenal, partly because the enforcement mechanisms of the euro zone's Stability And Growth Pact (SGP), which ostensibly puts tight limits on deficit spending, have not been effective. The International Monetary fund predicts a steadily rising debt-to-GDP ratio for the euro zone to as a whole. In 2007, it was 66 per cent. This year the figure will be about 86 per cent, rising to 96 per cent in 2014, the IMF says.
“As the enforcement mechanisms of the SGP are toothless, countries have no incentive to be fiscally responsible,” Mr. Annunziata said. “If you run a loose fiscal polity, the benefits are all yours – higher economic growth and happy voters – whereas the costs are spread over the whole euro zone, and eventually someone will help you out.”
While a bailout of Greece sponsored by the IMF or the euro zone countries is possible, Mr. Trichet of the ECB said he was “confident that the Greek government will take all the decisions that will permit [it] to reach that goal” of cutting is deficit to 3 per cent of GDP, the European Union's limit, in 2012. Greece's budget deficit is currently 12.7 per cent, the EU's biggest.
Greece's austerity plan is only partly in place. So far it includes a tax on fuels and the extension of a wage freeze to the whole public sector. The government also announced it intends to raise the retirement age, but has given no details. The European Commission, the EU's executive arm, has endorsed the plan, but insisted that Greece “can and must do better.”
The Greek government's spending reductions are politically unpopular, especially since the wage freeze reverses a post-election pledge made in October by Prime Minister George Papandreou. To protest the cutbacks, Greece's biggest union, the GSEE, approved the second mass strike this month and tax collectors began a 48-hour walkout.
The GSEE represents about two million workers in the private sector and voted to walk out on Feb. 24. The biggest public employee union plans a Feb. 10 strike.
With files from reporter Boyd Erman
