Warning of ‘contagion’ in eurozone

AS Greece’s financial woes send shockwaves through the world’s financial markets, a leading economist has warned of its contagion effect on Ireland and other struggling European economies.

Greece has come under intense pressure to slash spending after it revealed a massive and previously undeclared budget shortfall last year.

Its deficit spiralled to above 12% of economic output in 2009, more than four times the eurozone limit.

Austerity measures, including plans to freeze salaries and increase the retirement age to 63, have been met by strikes that have closed schools and grounded flights.

Meanwhile, speculation of a bailout within the European Union has been on the increase as leaders prepare for a crucial summit on the issue today.

European governments were initially reluctant to help Greece out of its self-inflicted crisis.

Dan O’Brien, senior editor with The Economist Intelligence Unit, said countries in the eurozone, including Ireland, were linked together by close economic and financial ties.

“If one country is weak there is a contagion effect,” he said.

“We saw that last year when Ireland was considered the weakest country in the eurozone, and that made other countries’ borrowing more costly.”

When “massive deception” became clear in Greece all credibility evaporated and there has been a gathering panic since then.

“The crisis we are in now is the most serious since the aftermath of the collapse of Lehmann Brothers,” O’Brien said. Part of the problem was related to speculative attack, he added.

“Given Greece’s very large deficit, very large debt and its complete lack of credibility, there is reason to fear.

“And the brutal truth is that when Greece comes to paying back debt that is due to be paid back in April and May, it will have to borrow more money. And the balance of probability now is it will not be able to do that on its own and we are therefore into bailout territory.”

Greece had gone too far to be able to save itself, he said. But when Governments made decisions in a “crisis mode” it is never good.