WORLD VIEW:Inaction or indecision on Greek fiscal crisis risks contributing to the EU's irrelevance and decline, writes PAUL GILLESPIE
ECONOMIC AND monetary unions are only as good as their ability to withstand a shock that threatens their foundations. Most are national, which normally gives them the tax and spending powers necessary to tackle crises legitimately if the political will is there. This sets the European Union apart, because it lacks such powers to defend the euro. Greece’s fiscal crisis is forcing the EU to confront this inadequate design during its biggest shock since the single currency was launched in 1999.
EU institutions have played a minimal role in resolving the credit crunch recession over the last two years. National governments took the crucial decisions about bank rescues, economic stimuli and spending cuts. The European Commission and the group of finance ministers stayed on the sideline, although there was some co-ordination through the European Council. This is how governments preferred it, of course. The majority resist pooling sovereignty in these respects – not least in Ireland.
Confronted with the possibility of a Greek sovereign debt default, however, they have scrambled to find ways to prevent what the German economy minister described as potentially “fatal effects on all states in the euro zone”. Reports that Greece is discussing a rescue package with the Chinese rattled markets, since that would be even worse for the euro’s reputation than intervention by the International Monetary Fund. Greek ministers denied them, saying a bond issue was over-subscribed this week. But the interest rates charged are far above those for German bonds – unsustainably so, many believe.
Reports that French and German officials are exploring how to stage a rescue were also denied; but in Brussels it was confirmed that plans are indeed being discussed. Article 122 of the Lisbon Treaty allows that EU financial assistance may be given to a member in difficulties. How to organise that for Greece is the problem. Its domestic savings ratio is so low and its external debt so high, intervention could be costly and prolonged. There is a fear of setting precedents that could tempt other states into moral hazard.
In an addition to the EU’s existing repertoire of acronyms Portugal, Ireland, Greece and Spain have been dubbed “pigs” because of their vulnerability to economic shocks during this crisis. The Government would dearly like to escape from this group, as its economist adviser Alan Ahearne recently explained. He hopes Ireland’s willingness to cut State spending and public sector pay, which has already differentiated us from Greece and is recognised in lower interest rate spreads on Irish borrowing, will associate us rather with Finland, Belgium and the Netherlands in a few years’ time, if the recovery programme works.
Credibility is Greece’s problem, arising first from the shock of statistical unreliability under its new Socialist government, which doubled the estimated current public budgetary deficit, and now from a disbelief in that government’s ability to deliver on its austerity programme.
It includes a combined €8 billion of tax increases and spending cuts this year, with cuts in public sector wages, fewer civil service jobs and higher taxes across the board. The plan also means closing tax loopholes and cracking down on widespread tax evasion, perhaps 30 per cent of government revenues. There is now greater public acceptance of the need for such measures, but still scepticism on whether Greeks are ready to cut their incomes by 10 per cent or more.
The case for solidarity action is strong in the interests of the whole euro system and for wider considerations of the public good. That could be done by issuing eurobonds, to which all 27 EU member states, or only the 16 euro zone members, would subscribe, subject to onerous conditions. Such a funding plan has been resisted by Germany. It fears becoming paymaster again, as it was in the 1990s with regional and structural funds.
But it gained enormously as an exporting country by EU enlargement, and now does from the euro, and so has to balance international costs and benefits. Other states are wary of conceding more intrusive policing powers on such loans to EU institutions.
The alternative to some kind of collective action would be an inaction or indecision that risks contributing to the EU’s irrelevance and decline. Economic and monetary union, designed 20 years ago and implemented 10 years later, badly needs revisiting in the light of changing circumstances since then, exemplified by this shock.
It is much more monetary than economic, as seen in the European Central Bank’s primary goal of price stability rather than full employment, sustainable growth or international co-operation. The EU’s budget, up for review this year, is a mere 1 per cent of its overall GDP, and quite inadequate to allow it act economically. The Growth and Stability Pact, adopted in Dublin in 1996, is increasingly dysfunctional, given that so many states outrun its 3 per cent deficit targets and is anyway much more concerned with stability than growth.
Such critical junctures are also opportunities for change. Having just come through the elongated Lisbon Treaty trauma the EU is disinclined to reopen its rule book. Thus change will come pragmatically and gradually, although the tempo of events like these speeds up decisions. Securing change requires open political debate about such alternatives far more than further treaty talk.
pegillespie@gmail.com