As the Greek Government has to raise more than €50 billion of public debt this year from markets that already question its ability to honour its debts, the 64,000-dollar question remains: how willing are Greece’s EU partners to bail it out?
There is the widespread view that Greece will be supported if default looks likely. After all, Joaquín Almunia, the former Monetary Affairs Commissioner, said as much at Davos. But the outlook became muddied at last week’s meeting of the Council of the European Union. There was clearly friction between Angela Merkel, the German Chancellor, mindful of taxpayers’ resistance to bailing out Greece in the name of EU solidarity, and President Sarkozy of France, who not only supported a bailout but, taking the opportunity afforded by crisis to further political union, also pushed for a centralised “economic government”.
For seasoned euro-watchers the current crisis comes as no surprise. The obsessive determination with which Europe’s politicians drove the euro project forward in the 1990s was, I remember, quite alarming. As the 1980s had been the decade of the single market, the 1990s would be the decade of the single currency. End of story. The European project must proceed irrespective of economic or popular considerations. A united European Union was Europe’s destiny.
The 1992 crisis in the exchange- rate mechanism culminating in Britain’s eviction, provided a thousand warnings. Without true structural economic convergence and/or a centralised economic government, some would struggle with a regime of a single interest rate and a common exchange rate, being deprived of key economic weapons, including devaluation.
True, there were the “eligibility criteria” concerning convergence on debt, deficits, inflation and interest rates. But they were flawed. The eurozone’s economies began to diverge almost from its very launch in 1999. In the early 2000s German economic growth was weak and the European Central Bank kept rates low to accommodate Germany’s circumstances. But these rates were significantly too low for the peripheral countries of Greece, Spain, Portugal and Ireland (sometimes known as the “Club Med”) and helped to fuel spending and property booms. Wage inflation was also a feature of the boom times, undermining competitiveness. The accession of the low-cost Eastern European countries exacerbated their plight. Meanwhile Germany, with Lutheran discipline, went on a cost-cutting spree, sharpening its international competitiveness and boosting its trade surpluses.
The Club Med’s public deficits, reflecting the recession, have exploded. And they are now being exhorted, in accordance with the rules of the eurozone, to cut their borrowing sharply. Even though still in recession they are facing tough fiscal retrenchment, which can only delay recovery further.
Economic salvation could come if Germany changed the habit of a lifetime and stimulated rapid domestic demand-led growth, but this is highly unlikely. Alternatively a huge extension of transfers from the richer EU countries to the poorer may be a way out but whether this would be acceptable to the taxpayers of Germany, the UK or the Netherlands is doubtful.
Then there is the special problem of Greece, which must be held responsible for much of its unique plight. It falsified vital data in order to join the euro, its public sector is bloated, tax evasion is a way of life and it has made little attempt to sharpen up its economy in order to thrive within the eurozone. Greece has, moreover, been generously subsidised by the EU. In 2008 it received net receipts from the EU budget of €6.2 billion, the most for any EU member state, €550 for each of its 11.3 million citizens.
The Greek Government said last October that public borrowing as a share of GDP was heading for 13 per cent in 2009 and, under pressure from Brussels, announced a stability plan to get borrowing down to 3 per cent of GDP by 2012. If a bailout is agreed, Brussels will insist that this fiscal consolidation goes ahead, as a minimum. Moreover, the Commission will strictly monitor and drive the programme, crippling Greece’s fiscal autonomy in the process. These developments will be politically unpalatable and probably trigger further industrial and social unrest. Unsurprisingly, the Greek Government is already resisting pressure for new austerity measures.
The eurozone is at a crossroads and, while the time is not ripe to address the fundamental problems of the euro, decisions over the Greek predicament are urgent. The EU broadly has two choices. It can guarantee a bailout for Greece, if needed, imposing tough conditions on the country. And it can hope that this will solve the current euro crisis. But this risks, as a minimum, demands from Spain, Portugal and Ireland for similar treatment.
Or, alternatively, it could bite on a very hard bullet and ask Greece to leave the eurozone, not least “pour encourager les autres”. (I am aware that there are apparently no formal procedures for this.) The financial repercussions would be tremendous, but financial crises eventually resolve themselves and if this boil has to burst, it’s better sto do it ooner rather than later. The political fallout would, however, be shattering. The eviction of Greece would be the first serious retreat of the European project and would represent a terrific loss of political face for the believers in European integration and solidarity.
The EU, with Germany playing a pivotal role, can therefore be expected to support Greece this time. But, for the sake of the long-term viability of the eurozone, it would be far better to evict Greece now and direct the beleaguered country to the IMF for some long overdue economic discipline.
Ruth Lea, economic adviser to the Arbuthnot Banking Group.