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Europe’s Downward Spiral: Portugal Gets Bailout But Greek Default Unavoidable, NYU’s Spence Says

Aaron Task
Editor in Chief
Fin - Daily Ticker - US

The European bailout parade continued Monday as EU and IMF officials agreed to a 78 billion euro ($116 billion) package for Portugal. The plan must still be approved by all EU members and Portugal's Parliament but policymakers were apparently undeterred by the scandal engulfing IMF President Dominique Strauss-Kahn, a.k.a. "Mr. Bailout."

Portugal's lame duck Prime Minister said the deal requires Portugal to lower its budget deficit from a target of 5.9% of GDP this year to 4.5% in 2012 on its way to the EU's mandated 3% in 2013, Der Spiegel reports. But if the recent experience in Greece is any indication, the accompanying austerity measures will cause tax receipts to drop and exacerbate the deficit rather than help alleviate it. (See: Europe's Debt Crisis Worsens: Is Austerity All It's Cracked Up to Be?)

"We're in for a period of bouts of contagion and volatility" in the EU, says Michael Spence, a Nobel-Prize winning economist and NYU Stern School Professor. "This could be hard enough that it causes a breakup [of the EU] but I don't still think that's the best guess."

The Europeans "will find a way to muddle through," the economist predicts. "It probably won't be pretty [but] the consequences of giving up on this enterprise are pretty dramatic."

That said, Spence is pretty convinced a Greek debt default is unavoidable. "There's a Greek tragedy developing," he says. "[Greece] is in a downward spiral."

Indeed, no matter how many bailouts the EU-IMF use to paper over Greece (and now Portugal), there's nothing 'pretty' about what's happening in Europe.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com