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Lisa Bryant | Paris 26 February 2010
A general view of a demonstration during a 24-hour nationwide strike in Athens, Greece, 24 Feb 2010
As Greece embarks on tough economic reforms it is facing the prospect of deep social unrest, with tens of thousands of workers taking to the streets this week. The Greek debt crisis is spilling over to other European economies - and threatening international prospects for economic recovery.
More strikes and social unrest. Tens of thousands of disgruntled workers spilled into Greek streets on Wednesday, registering their discontent with government austerity measures to control Greece's spiraling public deficit and debt. Greece's economic woes have posed the biggest challenge yet for the decade-old euro currency - and the 16 nations, including Greece, that make up the eurozone economy.
Greece has been a top subject in Brussels, where European Union leaders registered support for Athens and its economic reforms this month - but offered no financial assistance.
The Greek government has promised to slash its public deficit from nearly 13 percent of gross domestic product to nearly nine percent of Gross Domestic Product by the year's end. Greece's debt is currently estimated at more than $404 billion - or about 113 percent of its GDP.
Just how serious is the Greek crisis? Very serious, says economist Paula Subacchi of the Chatham House policy institute in London.
"The crisis is serious and it is serious for many reasons. One is because of the credibility of Greece. And the events of the past couple of days do not really improve confidence in the country and therefore foreign investors are very concerned," she said.
European Commissioner for the Economy Olli Rehn speaks during a media conference at EU headquarters in Brussels, 25 Feb. 2010
On Thursday, European Economic Commissioner Olli Rehn said he would personally inspect Greek's austerity plans after receiving a report from EU, European bank and IMF auditors who were in Athens this week. Speaking to reporters, Rehn outlined some of the spillover effects of Greece's problems.
"The mood deteriorated in some segments at the start of this year following growing concerns of the fiscal situation in some countries. This led to sharp increases in sovereign bond spreads in the euro area as we have seen recently - especially in the case of Greece," he said.
The European Commission - the EU's executive arm - says it will be monitoring Greece carefully to see it lives up to its promises. Commissioner Rehn says the Greek crisis serves as a lesson for the eurozone as a whole.
Several credit tracking agencies have downrated Greece's credit rating and Standard & Poor's warned it could do so again. That could put Greece in the high risk investment category, making it very difficult for the country to borrow money.
Polls show that despite the social protests, the majority of Greeks support the government's austerity measures. And Subacchi says it is critical Athens sticks to them.
"The Greek government has a huge problem. It needs first of all to regain credibility. And the way to do it is to make sure that the deficit reduction plan is credible. It's not overambitious with the risk of triggering the kind of protest we're seeing - but it's not too mild," said Subacchi.
Analysts fault several factors for Greece's debt crisis. The country overspent and failed to report the true size of its ballooning deficit to the European Union. Critics also say the European Union did not properly scrutinize the figures sent in by Athens.
But Simon Tilford, chief economist at the Center for European Reform in London, says the Greek crisis reflects a larger economic problem in Europe. EU members like the Netherlands and Germany have spent too little and their economies are driven by exports. Meanwhile, southern economies like Greece and Portugal have spent too much and amassed debts as a result.
"So in order to find a lasting solution, we need change on both sides. we need countries that have been hard hit in the south - such as Spain, Greece, Portugal, Italy - to take reforms to boost productivity growth, to cut costs, to manage their public sectors more efficiently," he said.
But Tilford says surplus countries like Germany have to provide more demand for southern European products.
Analysts fear Greece's economic crisis risks spilling over to other southern European countries with shaky economies. It has also raised questions on complex and questionable financial deals between Athens and financial companies like Goldman Sachs. But Tilford says these are symptoms and not the root causes of Greece's dilemma.
Analysts like Tilford and Subacchi believe European governments will ultimately come to Athens's financial rescue - because a Greek crisis may soon become a European one.
"I'm personally very convinced there eventually will be a solution to the Greek problem. Because we cannot think what a default of Greece will trigger. It's a risk nobody wants to take," said Subacchi.
Greece's problems are also spilling beyond Europe's borders. The value of the euro currency has plunged for example, which makes American exports - key to the U.S. economic recovery - less competitive.
Ultimately, Tilford says, the Greek problem reflects a world economic problem.
"The eurozone s really just a microcosm of the global problems we see. So unless we see the big countries in East Asia rebalancing away from exports and toward domestic demand, we are not going to generate a self-sustaining global economic recovery," he said.
But Tilford does not believe Europe is ready, or willing, yet to undertake fundamental economic reforms he thinks are needed to right these imbalances. The region may rescue Greece, he says, but it will only be putting a bandage on a far bigger problem.