European finance ministers agreed on Tuesday to provide €78 billion of emergency funds to Portugal even as Greece may need another lifeline later this year. Across the Atlantic, the US government on the same day hit a $14.3 trillion debt ceiling that is mandated by law. Its inability to borrow more money could technically lead to a debt default that will roil the global markets.
These two events show that Western economies continue to be rattled by the aftershocks of the financial crisis of 2008. Thankfully, these are still aftershocks rather than a new earthquake, assuming political leaders in Europe and the US take tough decisions to deal with their growing fiscal and public debt woes. The failure to compete, regulate the financial sector and reform the social security system could send these countries hurtling towards a new crisis.
The European Union and the International Monetary Fund will rustle up the money for Portugal. The bailout comes after Portugal agreed to undertake overdue reforms such as privatization of state assets, moving towards a more flexible labour market and strengthening the financial sector. These changes are essential if Portugal is to retain its economic vitality. One reason the bailout in Greece has not worked is that the Greeks have not followed up with the reforms they had promised in May. The bond markets are demanding higher interest rates on Greek government bonds than they were before the bailout.
In the US, the opposition Republicans have refused to extend the debt ceiling unless the Obama administration provides a credible plan to bring down the fiscal deficit to acceptable levels within the next 10 years. The haggling continues, but once again it is good to see that both sides now agree that the long-term solution is a return to a more balanced budget. The direction of the debate is positive.
The Western economic recovery is still fragile. The biggest risks have now been transferred from the private sector to the government balance sheets. A lot of hard work is needed to set them right.
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