Βι¶ΉΤΌΕΔ

Bail-outs focus on the short-term.

They are firefighting. They buy time. They help countries to manage their debts in the here and now.

They can keep at bay the harsh verdicts or judgements of the financial markets.

With the two euro-zone rescues so far the advice is the same.

The bail-out pill should be taken with "structural reforms" and "fiscal consolidation".

What this means, of course, is that the countries should use the loans to become more competitive and reduce their costs so as to usher in a period of prosperity in the future.

In Brussels on Tuesday, a Commission spokesman said that "decisive action should restore robust and sustainable growth". That's the plan.

But can it actually work?

Firstly, reducing the deficits is likely to reduce demand in the short-term.

Greece announced today there would have to be further cuts, probably targeting health spending and loss-making enterprises in the state sector.

These were concessions in order to qualify for a further tranche of money from the EU and the IMF.

Ireland is on the cusp of announcing a four-year plan. We know that savings of 15bn euros are on the cards.

In 2011 there are likely to be tax increases and spending cuts of a further 6 billion euros.

Both those countries have been reducing spending for some time.

Ireland was much praised for applying austerity early. Greece has been cutting wages and benefits in the public sector since May.

Spain announced today progress in reducing its budget deficit but unemployment is stubbornly stuck at 20% and growth hovers just about zero.

So how will these countries grow? Where will demand come from?

And how precisely will they become more competitive? Some of the structural changes - like making labour laws more flexible - will certainly help. But the gap between them and Germany continues to widen.

The main difficulty is that, being in a common currency, they have a fixed exchange rate and they cannot resort to devaluation which would make it easier to sell their goods and services abroad.

So there really is little alternative than to hold down wages for years to come. A generation - in these bail-out countries - will see a cut in living standards.

And that prompts another question - will the voters accept this as the price for defending a common currency

It is the long term nature of this crisis that is just beginning to gain recognition. Charles Grant from said "it will be a bloody mess for five years at least".

And if growth proves elusive how will Greece and Ireland pay back the loans?

Already Greece has asked and been assured that more help will be available when the rescue expires in 2013.

The short-term can be fixed. No problem. It is the future that looks so uncertain.

• Bookmark with:
• |
• |
• |
• |
• - What's this?