EDITORIAL: Greek rescue package

A financial rescue package for Greece, which is in the grip of a debt crisis, has been hammered out.

In return for a promise to carry out painful austerity measures to regain fiscal health, Greece will receive 110 billion euros (14 trillion yen) in loans over three years from the euro-zone countries of the European Union and the International Monetary Fund.

If European banks, which hold huge amounts of Greek government bonds, start faltering, serious repercussions will be felt throughout the global financial community. The Greek crisis was threatening to throw the world economy into turmoil just as the collapse of U.S. investment bank Lehman Brothers did in 2008.

The bailout package may defuse the situation for the time being, but it will not eliminate the fundamental vulnerabilities of the European financial system.

Markets are doubtful of whether the belt-tightening steps to be taken by Greece will be really effective.

There is also concern within the markets that if the crisis lingers on, unity among euro-zone countries, such as Germany, may vanish. The EU has no choice but to keep supporting Greece until the country restores its fiscal health.

Europe wavered and dithered until it agreed on the mammoth aid deal.

Greece's fiscal crisis came to the fore late last year. From the beginning, Germany, which was naturally expected to provide a big chunk of Europe's aid to Greece, distanced itself from the idea of bailing out the debt-ridden country.

Germany's reluctance to help Greece was taken by markets as a signal to dump Greek government bonds. The consequent collapse of Greek bond prices threatened the very credibility of the euro currency.

The February agreement among EU leaders to support Greece failed to calm the turmoil, prompting credit rating agencies to sharply downgrade Greek bonds. In the end, the EU had to seek IMF involvement in efforts to deal with the situation, effectively conceding that the EU cannot fix the problem on its own.

The euro is adopted by 16 EU member nations as their common currency under a monetary system controlled by the European Central Bank. This is a system based on the assumption that disparities in economic power among the member countries will shrink over time.

The system poses formidable economic challenges for countries like Greece that lack competitive industries because it is impossible for them to increase exports or attract tourists by depreciating their currencies.

It was clear that Greece needed radical reforms to catch up with leading euro-zone countries in terms of economic strength. But the Greek government not only neglected to make necessary efforts but also went so far as to falsify its economic statistics to conceal its huge budget deficit.

A country on the brink of bankruptcy due to its reckless deficit spending must be rescued by other nations with different governments. This is a different story from the situation in which large cities support depopulated rural areas within one country. It is natural that the people of countries on the giving end cannot readily accept the burden of rescuing the troubled country.

If Europe wants to preserve the credibility of the euro, which has emerged as a viable alternative to the U.S. dollar as a global currency, German Chancellor Angela Merkel and other European leaders need to convince the people of their countries that Greece must be kept afloat.

It is no exaggeration to say that the political credibility of the EU and its member countries will determine how this crisis pans out in the short term.

As for the long-term stability of the euro, the key factor will be progress toward political integration, given that the economies of the euro-zone countries are now integrated to the extent that there is no turning back.

If the euro fails to ride out the current crisis and regain the confidence of international markets, the world economy, including Japan's still wobbly economy, would be rocked again. The world is facing another critical economic juncture.

--The Asahi Shimbun, May 4