By ALAN CLENDENNING, Associated Press
MADRID (AP) — Chaos in Greek politics and Spanish banking combined this week to underscore just how fragile Europe's economy remains after an eviscerating austerity regime that has spawned unemployment, desperation and misery. And there is no respite in sight, as Germany's finance minister predicted Friday that the crisis could last up to another two years.
Wolfgang Shaeuble, who holds the region's purse strings, chastised the leaders of the world's biggest economies as they headed to Washington for a weekend summit for efforts at fixing the crisis over the past few years that "weren't good enough." The leaders, he told French Radio Europe 1, "must show that Europe can achieve common positions more quickly."
But common positions have been in short supply.
After more than a week trying to form a government, Greek politicians gave up this week and called another vote for June - with no real reason to think it will get them any further from the chaos that reigns. Spain was forced to deny that a troubled bank faced a run on its deposits, then saw a major ratings agency downgrade 16 of its lenders and four of its semi-autonomous regions, similar to U.S. states.
On Friday, Spain's central bank announced that the level of bad loans on the books of Spanish banks — hit by broke construction companies, recession and the worst unemployment rate in the 17-nation eurozone — is at an 18-year high, fueling concerns about the financial sector in the eurozone's fourth-largest economy. Just hours later, the nation's Finance Ministry said Spain may have to revise its 2011 budget deficit up to 8.9 percent because three regions overshot spending forecasts.
European countries with shaky economies like Spain are straining under high borrowing rates. The rates have risen as investors are nervous about governments' debt loads relative to the strength of the economies. Under pressure from Germany, Europe's strongest economy, governments have laid off workers, cut pay for others, reduced spending on social programs and imposed higher taxes and fees to boost revenue.
Yet as economies have shrunk, countries' debt levels have worsened. In Spain, where one out of every four citizens is jobless and the rate hits one out of every two people under 25, the interest rate on 10-year government bonds stood at a worrying high of 6.2 percent Friday, not far from the 7 percent mark that is considered unsustainable in the longer term and forced Greece, Ireland and Portugal to ask for bailouts.
This week's developments suggested that for some countries, the medicine - cutting budgets as part of excruciating austerity programs - may be worse than the disease. This can also be seen in the success at the polls of former opposition leaders, who are rising to power as voters reject austerity and call for a new way forward that generates growth and jobs for Europe and eradicates fears of a domino effect if Greece leaves the euro.
The nightmare scenario involves Greece being unable or unwilling to implement the cuts it needs to keep using the euro. Investors, fearful that Portugal, Ireland, Spain and Italy will follow Greece's path, would then pull their money out of those countries as well. That would likely be disastrous for the global economy - although it is so unprecedented that nobody really knows.
"If fears grow that Greece will be the first of potentially several economies to leave, then clearly that could have massive ramifications for the rest of the eurozone," said Ben May of Capital Economics in London.
"Clearly there's a risk that if policymakers dither and don't implement measures to reassure markets that there are sufficient firewalls to protect those larger economies, then in the event of a breakup that involved Greece and perhaps Portugal and Ireland, there could be pressure on Italy and Spain."
Having a plan in place to prevent contagion if Greece fails to comply with terms for its bailout is of vital importance, said Rui Barbara, asset manager at Portuguese financial group Banco Carregosa.
"Portugal and the other southern European countries would be the most affected by fears about another country's eurozone exit," he said. "Portugal, whether rightly or not, is widely regarded as the next in line after Greece. The perceived market risks about Portugal could bring a run on banks and massive capital flight. That would also affect southern European countries."