WASHINGTON — While storm clouds in Greece appeared to lift Thursday with political compromise, the broader European Union still faces numerous threats as other struggling economies such as Italy's remain in danger.
"The big question really is what happens to the rest of the area," said Diego Iscaro, a senior economist in London for forecaster IHS Global Insight.
Greek Prime Minister George Papandreou appeared to have negotiated a political deal that won the opposition party's commitment to back a government austerity program that was key to a debt relief accord reached with EU leaders last week.
The deal was an important symbol that Europe was working through its problems, though with Greece accounting for only 3 percent of the European Union economy, its problems pose only a small threat.
The real risks, however, come from larger troubled economies such as Spain and Italy.
As was the case in the 2008 U.S. financial crisis, investors quickly identify who they think is the next weak link, and in Europe that's Italy. It faces enormous financing needs and its embattled prime minister, Silvio Berlusconi, is fighting for political survival.
"This Italian government will have to get its act together and really put a credible reform program in place. And without these factors, the picture looks quite gloomy," Iscaro said.
Italy is in the crosshairs because Berlusconi has failed to deliver on promised economic reforms. He was forced to make new promises at last week's "summit to end all summits," yet after a Cabinet session Wednesday he arrived mostly empty-handed Thursday at the G20 meeting of industrialized countries, held in the French seaside city of Cannes.
"The fact that they haven't been able to reach consensus to put this package in place is quite worrying and illustrates political problems in Italy," said Iscaro, pointing to rising borrowing costs for the Italian government. "You're in a vicious cycle of contracting activity that puts public finances under more stress."
Among the promises Berlusconi made to EU partners but has failed to keep is selling off state companies, undertaking infrastructure spending to create jobs, and reducing Italy's notorious government bureaucracy to make its businesses more competitive. Separate from the EU promises, Italy is sinking under an aging population with costly government pensions and outdated labor laws.
Italy also has debts of about $2.6 trillion. The ratio of Italy's debt to its overall economy is around 120 percent. That debt ratio is what European leaders are trying to bring Greece down to by 2020, and it underscores how Italy and Greece face similar challenges.
"Berlusconi is likely to go the same way as Papandreou," said Jacob Kirkegaard, a research fellow at the Peter G. Peterson Institute for International Economics, a free-market Washington think tank. "I think the likelihood of Berlusconi leaving has gone up a lot."
Spain, another large and troubled European economy, already has imposed tough austerity measures and is lumbering through a downturn so severe that one in four Spaniards is unemployed. There has been political buy-in for austerity measures, but elections on Nov. 20 are set to completely shift power in Spain.
Opinion polls suggest that the conservative People's Party, which ruled from 1996 to 2004, will gain the largest parliamentary majority in decades. Its leaders have vowed to take austerity even further, promising to restructure the way government taxes and spends and revamp the relationship between the central and provincial governments.
That could put Spain on better footing, or it could create political strife that gets people out on the streets.
Portugal and Ireland, two other weak links in Europe, each have adopted severe austerity measures. Their risks are a weakening European economy that most analysts think is certain to enter at least a mild to moderate recession. If Europe's economy struggles, it could lead to pressure on global banks to do as they did with Greece and agree to take a 50 percent loss on the bonds they hold in exchange for the issuance of new bonds with handsomer returns.
Charles Dallara, the head of the Institute of International Finance, the trade group for big international financial institutions, doesn't think a Greek-like deal will be offered to anyone else.
"We see no evidence that suggests to us that there should be any extension of this unique approach that we have taken with Greece," he said Wednesday in a conference call with reporters, pointing to positive improvements in Portugal and Ireland. "I have every reason to believe that a new government in Spain will be able to build on the progress that has been made, particularly over the last year or so."
MORE FROM MCCLATCHY
Congressional debt panel told to be bold or risk economic disaster
Poll: One third of Texans say Perry's campaign is hurting state's image
Despite Nicaragua's Constitution, Ortega headed for re-election
To ask a question about this story or any economic question, go to McClatchy's economy Q&A
For more McClatchy politics coverage visit Planet Washington
Comments