European leaders have approved their latest aid package for Greece, raising hopes that the worst phase of the sovereign debt crisis is over and a persistent source of stress on global markets has been removed.
But Greece’s 130 billion euro ($172 billion) bailout highlights the weaknesses in Europe’s response to the crisis, some analysts say. The worry is that these problems could flare up and undermine recovery efforts in countries like Italy, Spain, Ireland and Portugal.
“I don’t want to be a Cassandra, but the idea that it’s over is an illusion,” said Kenneth S. Rogoff, a professor of economics at Harvard University and co-author of “This Time Is Different: Eight Centuries of Financial Folly.” “I am amazed by the short-term psychology in the market.”
Throughout the crisis, the European Union’s favored strategy has been to provide tightly controlled financial support to highly indebted countries, in the hope of buying them enough time to implement policies aimed at cutting budget deficits. While such moves can deepen recessions, the goal is to eventually lower debt levels and win back the confidence of the bond markets.
On the margins, investors are becoming more optimistic. The Continent’s stocks and government bonds have rallied sharply this year on the belief that Greece would avoid a disorderly exit from the euro.