EU Bailout: Short-Term Fix for Long-Term Problems?

Europe was the welcome beneficiary of measures to protect the zone's most indebted nations earlier this month. In the latest attempt to ward off fears surrounding the Greek economic crisis and restore faith in European markets, the European Union has stepped in with a huge bailout proposal that is designed to protect its vulnerable economies....

Europe was the welcome beneficiary of measures to protect the zone's most indebted nations earlier this month. In the latest attempt to ward off fears surrounding the Greek economic crisis and restore faith in European markets, the European Union has stepped in with a huge bailout proposal that is designed to protect its vulnerable economies.

The move is generally considered a risky one, with it only taking one nation to fall back on its pledge to bring about catastrophic consequences, but could it have the long-term desired effect?

Three-Step Bailout

To begin with, the European Commission will be calling upon a EUR60 billion fund, with contributions from all 27 European Union members, to help countries in trouble.

The second is a pledge from the 16 eurozone countries to make EUR440 billion available through loans and guarantees - which would be called upon should another member country default on its payments.

Finally, the International Monetary Fund has said that eurozone countries would be able to take advantage of an additional EUR250 billion of loans that it would make available.

What Effect Will it Have?

The immediate reaction of the financial sector was positive, as markets around Europe surged immediately after the news, while gold and silver also enjoyed increases.

But scepticism soon set in, with many adopting the view that it amounted to a short-term fix for a problem that has the potential to remain well into the future. The underlying problem still remains that countries such as Greece are left with enormous debts and a weak economy.

"Investors are still waiting to form an opinion on the package, and until they do, things are going to stay very volatile," Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto, told Reuters.

However, not everyone is so critical, as speaking to smartmoney.com, Ian Bremmer, president of Eurasia Group, explained that the long-term results of the bailout would be beneficial. "When this is all over, the euro emerges as a battle-tested currency, which it has not been until now," he says. "Not only will it survive, but it will be stronger for all the changes that will emerge in Europe as it works through this debt crisis."

In reality only time will tell if the measure works, but with such a lot riding on the result it is sure to be a hot topic of conversation for some time.ADNFCR-3415-ID-19779026-ADNFCR

- Wednesday 19 May 2010

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