The possibility of the European Economy inviting the double dip recession is almost certain. Experts say Greece will not be able to pay all of its debt. The fate of Europe and European Economy depends on how effectively countries entangled in debt crisis mitigate its impact.

European leaders, and especially leaders of devastated public finance systems, have lost sleep in order to keep the pulse of their economy beating. They are on the brink of collapse that might potentially drag-back the world economic growth rate to lowest in a decade.

The International Monetary Fund (IMF) and European Union (EU) have been attempting to keep the country solvent to avoid another recession hitting already weak global economy. The most outrageous shock will be on the EU banking industry as a whole, since European banks parked heavy doses of money into sovereign debt in the region.

Of all 17 nation bloc of Europe, exposure of France to Greek debt is $56.7bn, German exposure is $33.9bn, and the UK is $14.6bn. The EU and IMF agreed on 110bn Euros of bailout funds for Greece last year and again this year in July a further provision of 109bn Euros was agreed upon.

In July, European leaders agreed to provide an additional 109bn Euros bailout to Greece as it again came on the verge to default. Even so Greek Economy never settled on to that and situation got much worse. The problem with Greece, Italy, Spain, Ireland, and Portugal in a broader sense, is that they all were living beyond their means.

Over the last 5 years, the fiscal gap had been drenching wider and wider. All these nations had been spending far from revenue which led them to put reliance on debt, and because of this, the debt balloon is so big that it will possibly burst. According to Gary Jenkins, the head of fixed income research at Evolution securities, the timing of a Greek default remains in the hands of the troika (EU, ECB, and IMF), and it is difficult to believe that it will pull the plug at this stage.

Louise cooper, Market analyst at BCG Partners, shared his opinion on the situation. “I’m not sure that more austerity will help, which is troika demanding. What is needed is deep structural reform, which neither the Greek electorate or political class seem to have much appetite for.”

A recent report included a plan to eliminate 25,000 public sector employees hired last year, but according to spokesman for the European commission, Amadeus Altafaj-Tardio, new austerity measures aren’t on the table but negotiations are underway for full-fledged compliance with earlier agreed measures.

With drastic drop in public expenditure on various socio-economic fronts there has been wide-spread anger and violent protest in Greece so far this year. Greek default may sky-rocket cost of borrowing in the region and potentially Europe may face credit crunch which will be greatest hindrance to weak economies of the region.

If Greece somehow manages for an orderly default that might push repayments a decade ahead so confidence in the region might not get shaken completely or otherwise trust in the euro zone may be shattered forever. In its semi-annual World Economic Outlook, IMF gave a statement saying, “Global Activity has weakened and became more uneven; confidence has fallen sharply recently; and downside risks are growing.”

The Fund further said, “Greek default already affecting the world economy. Coupled with the economic slowdown in the United States and the impact of the Japanese earthquake, Europe’s debt crisis is putting the global recovery at risk.”
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About the author

Muhammed Faraaz
Post-graduate in Economics from India, unfolding complexities and policies. Proponent of Classical Economics.

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