ANALYSIS:If Athens cannot find a way out of the mire, it may soon fall to EU leaders to intervene, writes ARTHUR BEESLEY
THE ESCALATING economic crisis in Greece raises profound questions for the European authorities. As prime minister George Papandreou struggles to convince international markets that he can bring his wayward public finances to heel, there is fevered speculation in the European Union hierarchy about his country’s shaky prospects and the danger that it may require external assistance.
Papandreou’s latest austerity measures, unveiled on Monday before his European counterparts after he resolved anew to put his house in order, satisfied no one. Even before thousands of striking communist workers marched on the Greek parliament yesterday, Standard Poor’s ratings agency responded with an unsparing downgrade and a warning of more to come.
Amid rampant fear that Athens may be unable to avoid a debt default some time next year, the debate in Brussels centres on the mechanisms that could be deployed to prevent the country sliding into the abyss. It is a discussion with inevitable implications for the fundamental legal and political moorings that underpin monetary union, perhaps the greatest exemplar of European integration.
Basic union law prohibits EU bailouts for member states. On that the EU treaties are clear, saying “overdraft facilities or any other type of credit facility” with the European Central Bank (ECB) in favour of central governments “shall be prohibited”.
Yet a national default within the euro zone is something the union cannot contemplate for fear that it would have a ruinous contagion effect on other debt-dependent states, Ireland among them, as well as Portugal, Italy and Spain.
Notwithstanding the nascent recovery of the wider European economy, the system at large remains brittle and prone to shock. That banks throughout Europe are still reliant on extraordinary state support merely adds to pressure on the EU authorities to prise serious corrective action from Papandreou.
Hence ominous expressions of concern from Jean-Claude Trichet, the ECB chief, with other notables joining almost daily in the drumbeats. EU economic and monetary affairs commissioner Joaquin Almunia wants action now, as does the euro-group chairman Jean-Claude Juncker, and German chancellor Angela Merkel.
Little is explicit in this sensitive business, where messages of tacit support have accompanied warnings that action is required. If Papandreou cannot quickly find a way out of the mire, however, the implication is that it may soon fall to EU leaders to intervene. They may well be reluctant to do so, for such action would raise searching questions about national sovereignty and moral hazard. Still, they may have no choice.
In private discussion, however – and all discussions on this matter are held in private – the debate invariably ends up at the point at which the EU authorities would have to find a means of intervening themselves or calling on help from a body such as the International Monetary Fund (IMF).
At present, according to well-versed sources in Brussels, the balance of the argument lies in favour of co-ordinated action between the EU and the IMF should the evil day arrive. While the precise form of such possible action remains obscure, the overriding sense is that EU leaders would feel obliged to help a member of “the family”.
Although the no-bailout clause in the EU treaties also bans the ECB from directly purchasing debt from governments, recent Irish experience shows the domestic banks can use ECB liquidity to buy national debt. This form of indirect purchase demonstrates a certain flexibility in the system. Still, the ECB wants to unwind extraordinary support for banks. In addition, the markets would most likely punish banks that overexposed themselves to a precarious sovereign borrower.
For Irish people, this is something more than an esoteric debate. While Minister for Finance Brian Lenihan inflicted a supersized dose of austerity last week in his latest attempt to reassert control over the exchequer, Ireland was already paying more for debt due to the ripple effect from worries about Greece. If swingeing cutbacks in Dublin are not without human consequences, receiving minimal benefit for them from the markets due to trouble in faraway Athens stands as a vivid illustration of the risks inherent in the Greek situation.
It wasn’t supposed to be like this. A global economic crisis of the present scale may not have been envisaged when the EU Stability and Growth Pact was developed before the euro came into being. That said, however, the system was still designed to minimise the risk of disruption and contagion by keeping European economies broadly aligned under the supervision of the European Commission and the central bank in Frankfurt. It didn’t.
While the reasons for Ireland’s violation of the pact amid disappearing tax revenues and a collapsing property market have been well-aired, Greece is but a recent entrant to fiscal Death Valley. Never admired as a beacon of administrative concision or economic prowess, the Greek state has only once since 1981 managed to keep its budget deficit below the 3 per cent target set out in the EU pact. That was in 2006, recent enough but worlds away in economic terms. Although the deficit was known to be rising, the first hint that something was badly awry came last spring when the Greek authorities disclosed a sudden increase in the 2008 deficit.
There was much worse to come in October, weeks after the snap election that brought Papandreou’s socialist government to power. In a development that stunned Brussels, he revealed that the deficit this year will reach 12.7 per cent of gross domestic product, more than twice the previous forecast. It was enough to cast severe doubt over the credibility of all data coming from Athens, undermining Papandreou from the off.
Within weeks he was coming under yet more pressure following the disclosure that the Dubai authorities could not maintain repayments on the debts of emirate-owned Dubai World. Soon enough, the credit ratings that govern how much Greece pays for its €237 billion debt were cut. Papandreou, who had promised in his election campaign to ease Greece’s problems with spending measures, found himself browbeaten into a new austerity programme.
Concern in Brussels and other European capitals that his actions may fall short of his noble intent has amplified fear that credit markets might simply refuse to lend to Athens, prompting a default.
Outside intervention would be the final option. To dissuade any other errant member of the union from allowing their finances spiral beyond control, it is a given that any EU support would come at a steep price for the Greek people.
One week ago, Merkel said the situation raised questions as to whether Europe should seek to exercise pressure over national parliaments to stabilise a country’s public finances. If that seems like a doomsday scenario, it is a measure of the gravity of the problem Papandreou faces that she would say that in public at all.
Arthur Beesley is Europe Correspondent