Global Economy

[Guest]

[url="http://www.google.com/hostednews/afp/article/ALeqM5i3XoDZdlOI2jDGP3MGw7fkw_ZJ9Q"]Alarm spreads over Europe's massive deficits[/url]

BRUSSELS — The swelling public deficits in Portugal, Spain and Greece have plunged the eurozone into the biggest crisis in its 11-year life, presaging years of belt-tightening, analysts warn.



It is a vicious financial circle; the more fears over deficits and debts grow, the harder it becomes for the troubled eurozone nations to borrow money to stay afloat.

With 16 EU nations now using the euro the problems are resonating throughout bloc. The euro fell below 1.36 dollars on Friday, its lowest level in over eight months.



One risk is the "free loader" effect, said Patrick Artus, leading economist with Natixis.

That happens when other countries are forced to come to the aid of an ailing eurozone member "to avoid a default risk that would be very dangerous for the euro zone as a whole."

On the other hand if financial markets are not convinced that countries facing problems will be bailed out there will be a rise in risk premiums or worse.



National governments are doing all they can to keep the financial vultures at bay.

Spain and Portugal are particularly keen not to be tarred with the same brush as Greece, which has debts over 294 billion euros (412 billion dollars) and a 12.7-percent deficit, far beyond EU limits of three percent of output for eurozone members.

But the investors are jittery.



The Ibex-35 index of most traded Spanish stocks closed down 1.35 percent on Friday after plunging nearly six percent on Thursday amid growing concerns over the state of the economy.

Investors have no "objective" reason to worry about the state of Spanish public finances, Spain's secretary of state for the economy Jose Manuel Campa assured.

"Markets take decisions by evaluating perceived risk, which from a subjective point of view, are high. But from an objective point of view, there is no reason for this at the moment," he told AFP.

Portuguese Finance Minister Fernando Teixeira dos Santos insisted that his country had "nothing to do with Greece" and lashed out at investors targeting his country as "prey".

"Investors have an animal spirit," he said. "There is something irrational in the way they behave."



Eurozone officials have also rushed to reinforce the assurances about the countries of southern Europe which are in the fiscal spotlight, nicknamed "Club Med" by Germany or, unhappily, PIGS if the fallen Celtic Tiger economy of Ireland is included -- Portugal, Ireland, Greece, Spain.



Luxembourg Prime Minister Jean-Claude Juncker, the head of the Eurogroup of finance ministers, stressed that Spain and Portugal pose no risk to eurozone stability.

The European Union last week approved Greek efforts to tame its debt crisis but placed Athens under unprecedented economic scrutiny.



European Central Bank chief Jean-Claude Trichet did his best to support Athens but could only manage to say that the Greek government plans to reduce the country's growing deficit and debt "are steps in the right direction".



Athens most recently promised measures including a public salary freeze, an increase in petrol taxes and a hike in the retirement age.

However the moves have upset unions more than they have assuaged market sentiment.

Soon we may have to start thread, "Fall of Euro" or "Fall of European union"