Monday, December 28, 2009

The Greeks prefer to ask for gifts

When I said that the EU was on holiday and nothing much was happening there, I was a little economical with the truth. There is the ongoing saga of the Greek crisis. One might argue that financial crisis is an almost permanent feature of Greek politics but recently it has become bigger and more important. In fact, there has been talk of Greece becoming bankrupt, not a fate that usually befalls a country, however spendthrift its politicians might be.

There is an additional problem here. Greece is, after all, in the Economic and Monetary Union and its currency is the euro. What will happen to the other countries in EMU if one member is declared bankrupt?

This is what Der Spiegel wrote on the 14th:
German Chancellor Angela Merkel refrained from commenting for three long days as the value of the Greek bonds continued to fall. The chancellor knew she had to say something to prevent the nose dive. Something needed to be done to defuse the ticking time bomb threatening Europe and the euro: the possible bankruptcy of European Union member state Greece.

Speculators in the trading rooms of banks had been waiting for a signal. They wanted to know whether EU member states were going to rush to the aid of the hemorrhaging country on the Aegean. The longer they waited the further Greek bonds slipped - and the closer the country slid toward national bankruptcy.

Merkel doesn't believe that Greece can cope with its problems without help from Brussels - regardless of whether the Growth and Stability Pact prohibits such aid or not. That's what she told close advisers in the Chancellery on a number of occasions.
Some readers with long memories might recall that one of the arguments against entering the euro was that the Growth and Stability Pact would never be used against a recalcitrant member.

The rest of the article discusses the dire financial situation of the country and the various options open to the rest of the EU - not least the problem of what kind of signal would EU aid send to the Greek government. Then again, as the author points out with some agony in the words:
Europe might perhaps be able to afford to let a country go bankrupt just as the US was able to cope when California went broke. But what if this happens to a number of EU countries? That would trigger what euro skeptics warned about right from the start: the European common currency would collapse.
When I recall the hubris of that first day of the euro on January 1, 2002 when we were told by numerous commentators that finally politics triumphed over economics, I cannot help smiling wryly and recalling Margaret Thatcher's famous comment about not being able to buck the market.

It is, perhaps, particularly unfortunate that the Greek tragi-comedy should be unfolding now as the euro is officially the currency of the European Union since December 1 when the Constitutional Lisbon Treaty came into effect.

Today's article in Der Spiegel gets a little more precise. It seems that the EU will not let the IMF step in and rescue Greece because that would be against the rules:
It is becoming increasingly unlikely that the European Union will allow the International Monetary Fund (IMF) to step in and provide ailing euro zone member state Greece with a bailout. A growing number of politicians and central bankers are opposed to any form of IMF intervention.

"We don't need the IMF," Axel Weber, president of Germany's central bank, the Bundesbank, said, according to a report published in Monday's issue of SPIEGEL. Weber noted that it is illegal in Europe to finance budget deficits using the kind of central bank funds which are at the IMF's disposal. With his statement, Weber joins ranks with German Chancellor Angela Merkel, who believes IMF intervention would send the wrong political signal. The EU, she believes, is strong enough to handle Greece's problems on its own.

Central bankers also feel there's another reason the IMF shouldn't intervene: Greece's case, they argue, does not involve a loss of trust in the country's currency. Instead, they say, financial markets have doubts about the credibility of the debtor, the Greek state.
One can't help feeling that Chancellor Merkel is becoming a little confused as to which political signals are to be sent and to whom.

However, lessons need to be learnt, say some politicians:
Meanwhile, the research service of the German parliament, the Bundestag, has also analyzed the situation. In an assessment provided to Volker Wissing, a member of parliament with the business-friendly Free Democratic Party (FDP) -- which shares power in government with Merkel's Christian Democrats -- the experts concluded that a member state cannot be kicked out of the EU if it becomes insolvent. Nevertheless, if a euro zone member violates monetary union rules, certain rights that come with EU membership can be suspended. For example, a country could be temporarily stripped of its vote in the European Council, the EU institution comprised of the heads of government or state of the 27 member nations.

For that reason, Wissing is calling for the EU, "to thoroughly examine new members in the future to ensure that they will actually be in a position, in the long term, to meet the demands of a common currency."
Can't wait to see which rights of which bankrupt country will be suspended.


  1. Thanks!

    Yes, we told 'em, but did they listen? Noooo. (By them I of course intend our political "elites". The voters understood and voted accordingly.)

    During our campaign Bernard Connolly gave a talk to our group (and the press) outlining exactly the present Greek tragedy (although he used Portugal as a probable example). Connolly noted that there were only two solutions; either suspend the bankrupt country form the EMU (in which case the Euro would no longer buck the maket) or bail out the offending country. However, if the EU were to chose the second alternative it would almost certainly be followed by suspension of democracy in that country, to make certain that one would enact austerity measures advocated by the European Council and the ECB.

    Der Spiegel had softened Merkel's statement "somewhat". This is what she said according to EUObserver:

    "If, for example, there are problems with the Stability and Growth Pact in one country and it can only be solved by having social reforms carried out in this country, then of course the question arises, what influence does Europe have on national parliaments to see to it that Europe is not stopped," said the leader of Europe's largest economy in a speech."

    "This is going to be a very difficult task because of course national parliaments certainly don't wish to be told what to do. We must be aware of such problems in the next few years."

    Makes Bernard Connolly appear almost prophetical. So, we will have to wait and see which rights in the EU and at home will be suspended in which country.

    Peace and prosperity, wasn't that what they promised us when we joined the EU? Not sure about either.

  2. Sorry. Post above was by me - no, not Eloise but:


  3. Wouldn't it be nice to have Eloise on this forum as well as you, Mikgen. OK, failing that, I shall find Kay Thompson on YouTube. :)

  4. Article 123 TFEU says: "Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments."

  5. (So, if the ECB and member states are not allowed to step in - and the IMF is not wanted - what will happen?)

  6. Well, if the ECB cannot or will not hand out cheap loans (like they did earlier to Spain and also to Greece, pace Ambrose E-P), and if no direct transfers from other EU countries or support from the IMF will be forthcoming then Greece will be forced to serious cut-backs, such as reduction in health-care costs, pensions and unemployment support. How a country like Greece will be able to do that and still retain its parliamentary democracy is a question that is still to be answered.


    PS: Of course they could split away from the euro - a painful remedy both politically and economically but it would probably work.

  7. MIkgen - let's hope they bring down the euro. I'm sure we wouldn't mind supporting their tourism industry in return.

  8. for political reasons Greece can't be bailed out. That would send a signal to other indebted Eurozone Members - Belgium, Italy - that they too can ask for a bailout ... (and who would pay for such a thing? Germany, I suppose, though it would be political dynamite there.

    for political reasons, Greece can't be thrown out of the Euro either. That would be very negative for the eurozone's credibility. In any case, being thrown out would do nothing to solve the country's structural problems.

    So there isn't a European solution. The EU will just have to put up with the situation and hope that, in the long-term, Greece can solve its public finances.

    (the Greek economy is fine, by the way, it's the public finances that are a mess due mainly to a backlog of uncollected tax revenues)

  9. Above post by me,