But how do we get to that blissful state where the governments of Greece, Ireland and Portugal can once again persuade investors to lend them money at an affordable interest rate, and no longer have to rely on help from the rest of Europe and the International Monetary Fund to bridge the gap between what they spend and the revenue they can raise?
To hear euro-zone politicians tell it, spending cuts are the key. Meeting Friday and Saturday near Budapest, euro-zone finance ministers emphasized that the Portuguese government will have to tighten its belt by a few more notches now it's dependent on the largesse of others.
But belt-tightening alone won't solve the Bailout Three's problems.
Even if a budget deficit is reduced, it's still a budget deficit, and that adds to government debt.
And the ability to service and repay a given amount of debt depends on the size of the economy—the bigger the gross domestic product, the more revenue can be raised through taxes to pass on to creditors.
To date, euro-zone policy makers have placed a lot more emphasis on the debt side of this relationship than the GDP side, which is odd, because without economic growth, it's difficult to see how the Bailout Three will be in a stronger position in 2013 than they are now. Indeed, it seems pretty likely that they will by then have a larger debt and either a GDP that isn't appreciably larger than now or, more likely, is even smaller.
That risk is clear from the IMF's latest forecasts for the global economy, which were published Monday. It now expects Greece's economy to contract by 3.0% this year, and Portugal's to shrink both this year and next. It does expect Ireland's economy to expand this year, but at half the rate it forecast in December.
This is the problem with austerity. Embarking on a program of cuts can reassure bond investors that a government isn't plummeting headlong toward default, and that can lead to a fall in government bond yields. But those very cuts lead consumers and businesses to become more cautious about their earnings and revenue prospects, and that hits growth.
The U.K. government has managed to put a lot of clear water between itself and the fiscal wrecks on the euro zone's furthest shores by embarking on an aggressive austerity program. But austerity has weakened growth. According to the IMF, the U.K. economy will grow by 1.7% this year, lagging behind the U.S., which is forecast to grow by 2.8% and hasn't yet gone down the austerity route.
Compared with the Bailout Three, the U.K. has the advantage of a currency that has depreciated in recent years, and there is a plausible rebalancing story that sees exports replace consumer spending and business replace government investment.
Ireland, Greece and Portugal will also be looking to exports to boost growth. Speaking Sunday, Portugal's outgoing Prime Minister José Sócrates said he wanted exports to account for 40% of GDP.
But how, without an escudo to devalue?
There are ways, though they are very painful. As the IMF observes, unit labor costs in Ireland have fallen by 10.4%, the equivalent of a currency depreciation. That led to a significant rise in exports as a share of GDP, though the problem with that is that GDP fell. And given the huge debts with which Irish consumers are burdened, the nation will have to do a lot of exporting to make up for weak domestic demand.
In any case, it's doubtful Portugal can export its way out of trouble. The Portuguese economy has been among the slowest-growing in the euro zone since the launch of the currency in 1999, and the underlying reason for that can't be fixed quickly, since it involves a massive improvement in educational attainment to boost very low productivity.
Greece has also started down the route of cutting labor costs, but without a strong existing base of exporting firms, this will take time to have a big impact, particularly since existing regulations make it difficult and expensive to start a business.
The warning signs are already there. Greece's budget deficit for 2010 was significantly higher than its target, as was Portugal's. And the Irish government recently reported that revenue from sales and income taxes were significantly lower than expected in the early months of this year. In all three cases, it has proven difficult to squeeze as much tax revenue out of shrinking economies as governments had hoped.
So perhaps the reason that the euro zone isn't talking about growth strategies for the Bailout Three is that there isn't much to talk about. And without growth, the debt problems will remain.
Come 2013, the likelihood is that some, if not all, of the bailed-out countries will still be unable to fund themselves in the international bond markets. And in 2013, the rules will change. Those countries that draw on the newly established European Stability Mechanism will undergo a "rigorous analysis of public-debt sustainability."
The document setting out the way the ESM will work goes on to say that if that analysis concludes there isn't any realistic way to make the debt sustainable, it will have to be restructured. And one of the key tests of sustainability is the ratio of debt to GDP.
Given what we can reasonably expect about the paths of public-sector debt and GDP over the next few years, a restructuring of the debts of at least one of the three seems very likely indeed.
