Brussels looks set to finally turn its back on beleaguered Greece

Thu, Jul 26, 2012, 01:00

EUROPEAN DIARY:As tension mounts over Greece’s future in Europe, it seems the final chapter of the saga is about to unfold, writes ARTHUR BEESLEY

GREECE IS under political and economic siege as its troubled government struggles to find a way of catching up on ground lost in its second bailout.

Europe is losing patience rapidly. At issue once more is whether the country can maintain its membership of the single currency. This time it’s really, really serious. A sense of urgency is increasingly palpable.

When the EU Commission said its chief José Manual Barroso would go to Greece today for talks with prime minister Antonis Samaras, a spokesman said the meeting was nothing more than a “regular” political engagement. In the same breath he said Barroso had not been to Athens since June 2009, prompting one wag to say it was clear that the meeting was not at all regular.

The fact remains Greece is under constant surveillance from Brussels and other big capitals, with every little move on the panorama noted in minute detail. The outlook appears grim.

Two months of inaction in Athens during successive election campaigns has delayed dozens of reforms tied to the second bailout, calling into question the delivery of crucial bailout loans. Recession too has worsened, undermining the basic fiscal assumptions which underpin the rescue plan.

Samaras made his name as opposition leader by criticising the austerity drive, arguing it only aggravated the crisis in Greece. Even if he manages to intensify a politically damaging reform drive to the satisfaction of his European masters, his administration is going to need considerably more than the €130 billion foreseen under the second bailout to keep the books balanced for years to come.

Precisely how much more is to be divined by inspectors from the EU-ECB-IMF “troika”, who are back in Athens this week. Estimates vary on a range between €20 billion and €50 billion. Even at the lower level, figures of this order present a huge problem for euro zone leaders as parliamentary approval is required to vary the bailout programme or provide additional loans to the country.

All of this feeds into a markedly downbeat atmosphere in Brussels over the prospects for the country. Amongst weary officials involved in the rescue effort, the thinking goes that Greece has but one last shot this summer to prove to its sponsors that it can implement the astringent reform programme. At the same time, it is readily acknowledged in private that quite a few finance ministries elsewhere in the euro zone have already given up hope of the country ever coming good within the single currency.

This helps explain the present unease, although the holiday exodus leaves an empty Brussels feeling something like a ghost city. An assortment of reports cite increased talk about a “Grexit” from the euro. Reports also refer to the International Monetary Fund’s supposed refusal to provide any more money to the country and to another round of debt restructuring.

Although soothing words from official sources insist nothing is preordained in advance of the troika’s ultimate findings, it all points to high tension. The Commission’s spokesman would not say what message Barroso will deliver to Samaras. Still, close observers of the Greek saga expect the prime minister will be told to up the ante considerably with a new swathe of unforgiving cutbacks.

The problem remains that earnest Greek announcements don’t necessarily lead to action.

As a result, there are fears that any extension of the loan programme could run into trouble in as many as eight or nine parliaments. The alternative course of a new dose of debt restructuring may prove equally toxic as the European Central Bank would incur losses on its holdings of Greek sovereign bonds and other member states might have to write down their loans to the country.

In that context, talk of Greece leaving the euro comes as no surprise. It is no surprise, either, that much of this is coming from Germany. Deputy chancellor Philip Rösler, head of the liberal Free Democrat flank of the Merkel administration, says a Greek exit has long ceased to be a frightening prospect. Similarly, Alexander Dobrindt of the Bavarian wing in the German government says Greece should prepare to pay wages and pensions in drachmas.

This is confidence-sapping stuff for those who still hope Greece can survive within the euro zone. At the same time, it reflects the view that Europe is now equipped to confront the threat of uncontrolled contagion in the euro zone if Greece leaves.

The scenario-planning is done, and there is some confidence that Europe could just about survive the fallout. That’s a rather big assumption to make, of course. Only two days ago, Moody’s credit rating agency warned of a Greek departure setting off a chain of “financial sector shocks and associated liquidity pressures for sovereigns and banks that policy makers could only contain at very high cost”.

That is to say nothing of the social and economic costs that would be borne within Greece itself. The sense of uncertainty is amplified by questions over the viability of the Spanish bailout and consequent pressure on Italy.