Public anger grows as taxpayer-funded bailouts prove costly failures

LESS than a month after European leaders unveiled a “comprehensive package” they said would fix the eurozone, their anti-crisis strategy is fraying and may be in need of a radical rethink.

Rising public anger in northern Europe at a series of taxpayer-funded bailouts is sending tremors through the political landscape, boosting anti-euro parties such as the True Finns in Finland and sparking policy rows in Germany. The emerging consensus that Greece will have to restructure its €327bn in sovereign debt, in spite of the EU/IMF rescue it secured one year ago, has made Europe’s promise to delay any private sector pain until 2013 look increasingly untenable.

The flaws in the eurozone strategy are being exposed just as it negotiates what is expected to be an €80bn aid deal for Portugal, whose own politicians have been arguing for months that the Greek and Irish bailout model is a failure.

This comes against a backdrop of deepening recession or unexpectedly weak growth in Europe’s austerity-hit periphery, which is reinforcing doubts about whether these countries can stage the strong recoveries needed to cut their debt and win back investors once bailout funds run out.

As resentment of bailouts rises in the north, opposition to further austerity is growing in the south, creating a dangerous dynamic that some experts think could force changes to Europe’s strategy within a matter of months.

“We are at a juncture where the gravity of the economic fundamentals and public opposition to further bailouts may pull the politicians in a new direction,” said Steen Jakobsen, chief economist at Saxo Bank.

“As long as their strategy is credible, they will continue down the same path. But now it looks like we are close to a turning point. The current path no longer looks as credible as it once did.”

The bloc’s biggest conundrum is Greece, a country whose sovereign debt levels are forecast to rise to 160% of annual output over the coming years, on a par with Zimbabwe.

Certain economists have been saying for months that this debt mountain is unsustainable, but some policymakers in Europe appear only now to be waking up to that fact.

The immediate dilemma they face is that the blueprint for their future financial safety net, the European Stability Mechanism (ESM), due to be established in mid-2013, does not offer the flexibility needed to deal swiftly and cleanly with the Greek debt problem.

By postponing the real pain until 2013, the bloc has guaranteed that the threat of a tough restructuring will hang over it like a dark cloud for at least two more years, hurting not only market sentiment towards Greece but also Ireland, Portugal, Spain and possibly others.

As Greece’s outstanding bonds mature, the EU/IMF are pumping money into Greece by extending it emergency loans under the country’s €110bn bailout deal. So when 2013 rolls around, European authorities and the IMF are likely to hold more than half of Greece’s total debt. If they then restructure Greek debt to return the country to a sustainable debt path, they would have to impose an aggressive haircut on themselves.

And even then, Greece might still need support from other European governments, probably for years. The only obvious way to avert this explosive scenario is for Europe to renege on its pledge and hit investors in Greek bonds now, accepting the risk of deterring investment in other countries’ bonds.

The wild card in all of this remains public opinion and politics. In Germany, the junior partner in Merkel’s coalition is vowing to defend parliament’s right to veto ESM payments. ESM is also running into trouble in Slovakia.

And the message that the True Finns are sending out — that taxpayer-funded bailouts are proving costly failures — could begin to resonate among European leaders at some point.