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Voter backlash could threaten Greek rescue plan

Luxembourg Prime Minister and Eurogroup president Jean-Claude Juncker (R) gestures with EU commissioner for Economic and Monetary Affairs Olli Rehn (L) on Febuary 15, 2010 during the final press conference of an Eurogroup meeting at the EU headquarters in Brussels.


The European Union's cautious, halting response to Greece's debt crisis reflects the growing lack of faith among voters in the ability of government institutions to solve problems without creating new ones.

Indeed, for the protesters in Athens and the German and French taxpayers who may in the end have to bail Greece out of the worst fiscal mess in the history of the 16-nation euro zone, Bank of Canada Governor Mark Carney's musing this weekend about the "limits of stimulus" might be the understatement of 2010.

Markets are signalling to economies around the world that the billions in government spending that helped countries ride out the recession must have an end point, Mr. Carney suggested in an interview with Bloomberg Television from Mumbai.

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It's a sentiment that's been picked up by voters on both sides of the Atlantic, as concerns over rising debt levels in the United States helped result in the loss of a key Democratic Senate seat, while in Germany, a survey found that more than half of respondents there believe the EU should kick Greece out of the euro zone if it can't get its debt under control.

Most economists agree on the urgent need to restore investor confidence in Greece's ability to get its finances in hand, and some say Germany - the biggest and most important economy in the euro zone - will soften its current no-bailout stance should a Greek debt default start looking inevitable, for fear it could trigger another global banking crisis.

At a meeting of EU finance ministers in Brussels on Monday, Economic and Monetary Affairs Commissioner Olli Rehn said Greece must do more to reduce its own budget gap before any concrete rescue plan is spelled out.

Greek Finance Minister George Papaconstantinou replied that the deficit-control blueprint his government has announced will be sufficient, and urged patience, even as he acknowledged his country is in a "terrible mess."

The risk premium on Greek debt decreased last week as European leaders moved toward crafting as-yet-unspecified support measures. Still, the euro fell because the affair has fuelled concerns about the entire bloc's stability.

That's in no small part because the continent's bigger economies are hesitant to provide aid that isn't viewed as relatively painless by their citizenries, while smaller countries are loath to agree to strict conditions on any help because their voting publics worry the cure will be worse than the disease.

Greek labour unions took to the streets to oppose the socialist government's austerity plan, yet other euro members are demanding that Greece demonstrate more willingness to tackle its debt before the EU offers a hand.

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"Nobody can spare Greece the task of cleaning up its own house," Austrian Finance Minister Josef Proell told Bloomberg News in Brussels. "Only then will we decide whether financial signals have to be sent."

Making matters worse, a Greek government inquiry has found some of the country's debt may have been hidden through a series of swaps agreements with securities firms, a development unlikely to warm hearts in Germany, where some economists fear a double-dip recession.

While angry, volatile electorates provide vivid glimpses into democracy in action, they also can deter governments from taking necessary action.

In Europe, this is causing a chain reaction, where images of striking workers make Greek politicians skittish about agreeing to move more quickly to rein in spending, which renders German voters reluctant to see their government aid in any rescue. The net result is a weaker euro and another display of how difficult Europe finds it to solve its problems internally.

The populist backlash in the United States came close to cutting short Ben Bernanke's tenure at the helm of the U.S. Federal Reserve Board, as lawmakers looked for an easy target after Republican Scott Brown's surprise win in a former Democratic stronghold put a focus on voter rage percolating across the country.

Trouble is, replacing Mr. Bernanke might have threatened the economic rebound by spooking financial markets; just as a failure by the EU to come up with a solid, realistic route out of the Greek debt mess could too.

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Just as the Democrats ignored their constitutents' hunger to see Mr. Bernanke's head roll and voted for his reappointment, so Greek and other European policy makers would be wise to ignore opinion polls until the EU has reviewed a progress report that Greece will submit on March 16.

With files from reporter Eric Reguly in Rome, Reuters, Bloomberg

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