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Against the tide: It’s in the eurozone’s DNA

If market confidence in the eurozone is to be restored, not just Greece and Ireland but also Portugal and Spain need the attention of the EU’s Financial Stability Facility.

There is a double helix of causes of the eurozone debt crisis.

On one chain (Greece and Portugal) it is a problem of a bloated government sector, chronic fiscal profligacy and weak competitiveness. On the other chain (Ireland and Spain), it is a credit-fuelled asset bubble that burst, leaving the banking system in tatters. So the solutions are also different: cleansing the banking sector for Spain and Ireland; downsizing the state sector and increasing productivity for Greece and Portugal.

The eurozone crisis four (Greece, Ireland, Portugal and Spain) have been running budget deficits of between 8% and 12% of GDP, compared with the eurozone average of about 6.5%. Their gross public debt to GDP has reached between 75% and 130% of GDP. Only Spain will be below 100% of GDP in 2011. And gross financing requirements over the next year are around 20% of GDP.

In Greece and Portugal, the crisis was caused by a bloated government sector, whose fiscal arithmetic was deteriorating even during the boom years because of a lack of competitiveness and low productivity in the private sector that inhibited investment and growth.

In the more dynamic export economies of Ireland and Spain, the government sector was in relatively good shape before the crisis.

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