There were a lot of debates on how to deal with Greek second bailout before the EU special summit on July 21, 2011. Such questions were frequently asked: will Germany become the only one EU member state to have ability to save the Euro zone and Euro from disintegration or current European Debt Crisis, will it trigger new round international financial Crisis? Recently, the Euro area countries have agreed on a new loan package for Greece, from which, several important signals about the European debt crisis have been given.

Second bailout package for Greece safeguards Euro and Euro zone

Even before the EU special summit there were still different views on how to bailout Greece among EU member states. However there is no doubt that both Germany and France, as the axis of European community development, still have some confidence in Euro zone's prospects and believe that the Euro will continue to appreciate under the international financial system. In order to stabilize the Euro area's public finances, it is necessary for the European Commission to approve a second bailout to Greece, not only to safeguard Greece's public financial stability, but also prevent the Greek debt crisis from spreading to other EU member states such as Italy or Spain. If a domino effect from the debt crisis were to happen, it could have a negative impact on the global economy.

EFSF emerging as important economic governance tool and possible European version of IMF

EFSF (European Financial Stability Facility) was created by the euro area member states following the decisions taken May 9, 2010 within the framework of the Ecofin Council. EFSF is a Luxembourg-registered company owned by the Euro Area member states. It is headed by Klaus Regling, former Director-General for economic and financial affairs at the European Commission. The second bailout package includes the extension of the powers of the EFSF, which will guarantee more competent and flexible Greek government bonds. European Commission President Jose Manuel Barroso has emphasized that ambitious reform of the EFSF will make it more flexible and effective. Inevitably, EFSF will gain legitimacy by raising money from the capital market. Its authority can also be enhanced by bailing out heavily indebted countries. The EFSF will function as an innovative institution of economic governance for Europe. We believe that this is a mid-term solution for tackling the European debt crisis.

Using the PPP model to solve the Greek debt Crisis

In the second bailout package, the European commission finally decided to allow private investors to voluntarily provide financial support to alleviate Greek Debt Crisis. The feasibility and limits of Private Sector Involvement (PSI) means that the EU has gradually realized that Government interventionism or neo-Keynesian policies are not long-term solutions to counteracting the European debt crisis. In some ways, market forces can still automatically regulate the allocation of resources and the adjustment of economic structure. Now the European Commission is clear about what they mean by PSI. Since PSI is a voluntary approach by the private sector, it works with the markets, not against them. Euro zone leaders have agreed to try to use the Public-Private Partnership (PPP) model to tackle Greek debt crisis. Of the solution, EC president Barroso said "It is the first time since the beginning of the crisis that we can say that politics and the markets are coming together".

A Skeptical attitude towards timely repayment of Greek debt

If we analyze the new bailout package for Greece, it seems that at least at this moment the EC member nations still lack confidence in Greece's ability to repay its debt on schedule. The EC has taken measures to lower interest rates and extend debt maturities to give Greece more room to improve the sustainability of its finances. Such expansionary measures clarify the majority of Euro zone countries are skeptical or somewhat pessimistic about Greece's ability to alleviate the crisis. The second bailout package intends to prevent Greek debt crisis from spreading to Spain or Italy, and will serve as an important measure for safeguarding the stability of finances in the Euro zone.

Green sector growth a possible solution for alleviating the European debt crisis

In a word, the Greek debt crisis was mainly caused by excessive public spending and high risk capital speculation. The 2008 international financial crisis severely impacted European economic growth. It exposed some of the EU member states' public finance problems: high social welfare levels and expansionary fiscal policies push financial budgets and public debt higher than the targets which existed when the Maastricht treaty set up.

Can the Greek and European debt crises be solved once and for all by the EFSF economic governance mechanism or by introducing PPP model? If fiscal austerity measures do not take effect immediately and economic reform lags behind what is expected, Greece's R&D sector will still be in a disadvantaged position. Even with the EFSF mechanism and relaxed repayment schedule, in the short run, Greek debt crisis can not been smoothly tackled. Greece and the EU have to look for new growth sectors. The green and low-carbon sectors will be one of the best solutions for the European sovereign debt crisis in the long run.

Professor Zhang Min is dean of Science and Technology Policy Division at the Institute of European Studies, Chinese Academy of Social Sciences.

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