Alarm spreads over European nations massive deficits

European Central Bank chief, Jean-Claude Trichet, did his best to support Athens but could only manage to say that the Greek government plans to reduce the country's growing deficit and debt “are steps in the right direction”.

Athens most recently promised measures including a public salary freeze, an increase in petrol taxes and a hike in the retirement age.

However the moves have upset unions more than they have assuaged market sentiment.

Greek shares closed down 3.73 percent on Friday. Meanwhile, Greek credit default swaps — bought to cover losses in case of default on debt repayments — rose 19.5 basis points to 446.5.

And while there seems very little possibility that Greece will be forced out of the euro, a move acceptable neither politically or economically, the underlining question persists: Can the monetary union ride out the storm?

The eurozone is “undergoing its first real test,” since its birth on January 1, 1999, according to renowned United States (U.S.) economist, Nouriel Roubini.

Economists at the Royal Bank of Scotland warn that the situation is such that mere words are not enough.

That leaves Greece's European partners under pressure to come up with some kind of financial aid mechanism for Athens, perhaps via bilateral loans, a solution which would be politically less humiliating than a eurozone country going cap in hand to the International Monetary Fund.

IMF head Dominique Strauss-Kahn said the other eurozone nations must help Greece “in some form or another”.

The Greek government agrees, suggesting some kind of euro-bonds issue and common loans from several nations to spread the risk.

Those calls will be heard by EU heads of state and government when they meet in Brussels for a special summit in Brussels on Thursday.

The European leaders will also be mulling their own recovery efforts as the bloc faces years of cuts in public spending to reduce the growing deficits which the 2008 economic crash highlighted and heightened.

They will be wondering how much “contagion” they will suffer from Greece.

“A lot depends on how the Greek crisis will be solved,” said Italian-based Unicredit researchers.

“The more the solution will look like a bail out, the less likely will be the contagion scenario.

“The more Greece will be asked to walk out of the crisis on its own legs, the more investors will turn to other European Monetary Union countries and ask who might be able to weather a crisis almost only on its own.”

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