Economists: Europe Stuck On Bailout Merry-go-round

Economists warn such relief is only temporary. The eurozone's weakest economies must convince investors they can repay their debts without special help.

Yet the economies of Spain, Italy, Portugal and Greece are forecast to shrink this year, while Ireland alone might eke out a small gain. All are expected to cut spending and raise taxes ⿿ sucking money out of their cash-strapped economies.

"Portugal is the next great litmus test for the eurozone," said Constantin Gurdgiev, an economist who teaches finance at Trinity College Dublin. "We know it cannot avoid a second bailout. And Portugal offers a sneak preview of what is going to happen in Spain."

To maintain investors' confidence in the euro, economists say Europe must build a financial "firewall" exceeding ⿬1 trillion, a figure big enough to provide credible aid in the event that Spain and Italy are priced out of the bond markets.

Europe's future rescue fund due to come into force in July, the European Stability Mechanism, as envisioned barely cracks ⿬500 billion ⿿ and some ⿬200 billion of that is already earmarked for use in the existing Greek, Irish and Portuguese bailouts. Much of what's left could be hoovered up by a second bailout for Portugal and Ireland and a further bailout for Greece.

European finance ministers meet next week in Copenhagen to discuss plans to raise the firewall by up to another ⿬240 billion, a move being resisted by Germany. But even a firewall claiming a headline figure of ⿬740 billion seems too small to reassure the markets about Spain and Italy, whose government debt stands at a combined ⿬2.6 trillion ($3.4 trillion).

"If we had a rescue umbrella over the whole eurozone for Italy and Spain, which is clearly not the case now, this would reduce the risks involved," said Ulrike Rondorf, a Commerzbank economist in Frankfurt.

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