Rehn: EU Won't Let Greece Default, Quit Euro Zone

Olli Rehn, the Monetary Affairs European Commissioner, informs about the EU Autumn interim forecast 2011-12 during a news conference at the EU council headquarters in Brussels, Belgium, on 15 September 2011. EPA/BGNES

The European Union will not allow a Greek default or dropout from the euro zone, according to EU Commissioner for Economic and Monetary Affairs Olli Rehn.

At the same time, however, debt-stricken Greece needs to do more to implement the promises it has made to its international creditors, Rehn stressed on Thursday.

"An uncontrolled default or exit of Greece from the euro zone would cause enormous economic and social damage, not only to Greece but to the European Union as a whole, and have serious spillovers to the world economy," Olli Rehn said according to the text of his speech at the Peterson Institute in Washington, as cited by Dow Jones.

"We will not let this happen," added the EU Commissioner.

Nonetheless, he warned that Greece must do more to justify the EUR 109 B bailout package that EU ministers agreed on back in June 2011, after the initial EUR 110 B from 2010.

"A condition for the new program is that Greece implements all the corrective measures required, without any wavering," Rehn said. "In the past couple of weeks Greece has gone a long way toward meeting these demands, but we are not quite there yet."

Rehn's statement comes a day after the Greek Parliament approved a new painful austerity package in order to secure the next tranche of foreign aid under the bailout plans.

He added that Ireland and Portugal, the other countries to receive aid, are doing much better. He said the Irish are on their way "to sustained recovery."

Rehn also warned of a continued slowdown in growth in the euro zone saying that while year-on-year growth would likely be around 1.7% in 2011, growth will reach a "virtual standstill" toward the end of the year.

"While we do not forecast a recession or double dip for Europe, the change in the outlook is both disappointing and worrying," he said.

Rehn said that there is little room for European nations to prime the fiscal pumps to try to restore growth. He said in some countries "the sovereigns either do not have access to market financing or it is becoming prohibitively expensive."

For other countries, he said, long-term fiscal challenges like an ageing population also make fiscal consolidation "well-advised."

Rehn acknowledged that crisis management in the euro zone and communication had added to the region's problems--often proving "rather belated, piece-meal and not well communicated."

However, he said the substance of the measures taken to improve the fiscal outlook and to shore up the banking system was "better than their reputation."

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