European politics

Charlemagne's notebook

Greece and the euro

Bailing out the bail-out

May 9th 2011, 16:12 by Charlemagne | BERLIN

IT WAS a year ago that the European Union produced its big bazooka to quell the euro area’s sovereign-debt crisis: a €750 billion fund to safeguard the single currency, following within days of the €110 billion bail-out of Greece. It did not work. Ireland has since been bailed out, and a rescue of Portugal is in the works. Greece looks closer than ever to defaulting, or at least to having its debt restructured.

After a year of muddling along, the EU seems more muddled than ever. The disarray was painfully apparent over the weekend. News of a secret meeting of selected European finance ministers (including Greece's man, George Papaconstantinou, pictured above) in Luxembourg on May 6th was promptly leaked.  Der Spiegel reported that Greece was considering leaving the euro zone; the briefing note for the German finance minister, Wolfgang Schäuble, made clear this would be economic suicide. It would greatly expand (perhaps double) Greece’s debt burden, provoke capital flight, cause turmoil across Europe’s banks and endanger the country’s membership of the EU. Greece described the report as "borderline criminal".

Indeed, the idea of Greece giving up the euro has now generally been accepted as nonsense, but not before another upheaval in the markets (Greece was downgraded again by Standard & Poor's yesterday). The notion of Greece leaving the EU was “stupid”, declared Jean-Claude Juncker, the prime minister of Luxembourg (who presides over the euro area’s group of finance ministers), after hosting the meeting that his officials denied was taking place. Mr Juncker is, after all, the man who argued against transparency in decision-making, saying he was all for "secret, dark debates". He may think this is a sign of seriousness in economic policy, but this weekend he came across as incompetent.

It is possible that the meeting caused such confusion that the ministers felt compelled to rule out one option that  is being discussed more and more openly: restructuring Greek debt because of the country's inability to repay its loans, or even to balance its books, as austerity measures worsen the country’s recession.

So for now, it is the EU’s rescue plan that is being restructured. “We think that Greece does need a further adjustment programme”, said Mr Juncker. The details will be worked out at a meeting of finance ministers next week. The country is in no state to start tapping back into markets next year, as envisaged in its current bail-out plan. So European countries are likely to extend more assistance to Greece.

The options include giving it more time to meet its deficit-reduction targets (its budget deficit was 10.5% of GDP last year, a long way off its 8.1% goal), softening the terms for its current bail-out (by again reducing the interest rate or again stretching out its repayment schedule), issuing new loans, or having the EU buy new Greek bond issues in future. Mr Papaconstantinou suggested this last option was under active discussion. Ireland hopes it, too, will benefit from the rethink on Greece.

Plainly, the crisis requires fresh thinking. But so far the EU remains doggedly on its year-old path. First, do what is necessary, but no more than that, to avert a financial collapse in euro-area member states. And second, play for time in the hope that troubled economies will start to grow out of their difficulties, or at least until Europe’s banking sector strengthens sufficiently to cope with the losses on restructured government debt. Above all, push the problem beyond the political horizon of the euro area's main leaders: the 2012 presidential election in France, and the 2013 parliamentary election in Germany.

Forget the bazooka. Pass the pea-shooter.

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1-20 of 837
May 10th 2011 1:23 GMT

There is no doubt that the sovereign debt crisis in the Eurozone is becoming increasingly worrisome. However, when put into the context of the overall sovereign debt of the entire world, it is the levels of debt of both the United States and Japan that could prove critical to the world's fiscal future.

Here is a summary of the sovereign debt of the world, excluding the $100 trillion debt related to unfunded American entitlement programs:

http://viableopposition.blogspot.com/2011/04/debtworld-were-drowning-in-...

Robert North wrote:
May 10th 2011 1:40 GMT

Good article, especially the bit about Mr Juncker's incompetence. But I still feel you are being too generous. We cannot sail from crisis to crisis. We need to accept that growth is going to be modest and plan accordingly over the long term. Otherwise it will not be a matter of whether Greece remains in the Euro or not. It will simply happen of itself, and by emergency necessity.

Nom Deplume wrote:
May 10th 2011 2:22 GMT

@Steve Thompson - ...and to what purpose other than typical America bashing was your comment meant? Looking at the 'overall sovereign debt of the entire world' is utterly pointless... you overlook the word 'sovereign' in that term to the detriment of your argument. Clearly it is the debt of the USA that is the key linchpin to future economic direction 'for the world'. The article and discussion are around the EuroZone and it's member countries attempts to navigate through some very troubled waters. Greece must default. Anything else is simply throwing good money after bad. Even if they manage 10 solid years of austerity it isn't going to give them the growth they so vitally need to turn things around. Currently even if you brought them to 'even' they would STILL eventually fall behind due to their inherent uncompetitiveness and poorly managed taxation system. Remember they share a currency with all the other countries. They are not allowed to devalue their currency in any way, shape, or form; which, in the past, has pretty much always been a part of defaulting on your sovereign debts. So... now what?

Sorry guys I know you are fighting it tooth and nail, but the honest truth is you need a federal structure if you want to be competitive in 2050. You are enormous in potential. Twice the size of the USA in population, around the same landmass, more coastline on more oceans, etc. Or don't... and keep bickering and fighting amongst yourselves to the point of being nearly incapable of dealing with crises and challenges that cross 'national borders'.

AndreasSenior wrote:
May 10th 2011 2:25 GMT

Exactly a year ago the Greek Government received a pledge of 110 billion Euros on the understanding that massive reforms will be enforced to deal with the number one problem plaguing them, tax evasion on a massive scale. Nothing substantial has been achieved and tax evasion is rampant. Reading the Greek press one comes away with the feeling that the governing classes have no intention whatsoever of implementing anything remotely threatening to their way of living. George Papandreou comes across as a very week leader promising things he cannot deliver. The EU, ECB and the IMF must face reality and pull the plug no matter what happens next.

HansBau wrote:
May 10th 2011 6:02 GMT

Letting ridicule aside as in Tobias's ridiculous post(who seems to have no problem with a stiuation like Iran calling itself Republic of Europe and wanting anything 'european' to refer to them), the issues here are the following:
1)Papandreou cannot deliver, because what he promised to get elected is the exact opposite of what he is supposed to implement. It is funny that to gain the "trust" outside the country he needs to lose all trust -in fact commot outright fraud -in his own country
2)The whole idea of selling everything in order to keep borrowing is insane: It's like a fisherman selling off his boat and nets to keep gambling. The first thing they had to do is at least balance the budget at all costs.
3)Many -if not the majority-of the IMF demands are only meant to ensure that the IMF gets its money back(with interest), not lead to a sustainable situation. This would condemn the country to perpetual slavery in order to keep feeding people like Mr. Papandreou and his staff.

Serious Sam wrote:
May 10th 2011 7:10 GMT

Juncker is the head of a country with a population of 512.000, a medium sized city. It reamains a mystery how come this town major became the speaker of the EU finance ministers.

As for Greece, the country is bankrupt, since long. That was already the case as theridic ulous bailoutomania started one year ago. So the most idiotic thing to do now is to throw good money after the burned one. Especially since Greece stubbornly refuses to take the necessare actions. Means in the 1st place to end the national sport tax evasion, cut down the oversized and public sector which employs 770.000 out of a total workforce of 5.05 people, luxuriously compensated.

Greece wants to take the rest of Europe as hostage for its continuing profligacy, this must be ended, may it cost what it wants.

JoeSolaris wrote:
May 10th 2011 9:04 GMT

What a ridiculous set of comments.

1) As to Greek "competitiveness":

Greek exports have been recently:
2007 USD 24 billion
2008 USD 24 billion
2009 USD 29 billion
2010 USD 21 billion
2011 USD 21 billion (est.)

So, the country's exports were not hurt by the Great Recession, but rather took a hit last year in response to all the bad publicity regarding the bailout (plus severe recession in the Balkans, not being discussed internationally). Greek exports were 21 billion last year, with the euro below USD 1.30 and are estimated at 21 billion this year with the euro at USD 1.50. So where is the proof of that country's non-competitiveness?
I agree with Papandreou - if the international press would simply allow the country to resolve its problems in peace, things would be much easier.

How about addressing at a European level why the rest of the Balkans, from Albania to Hungary and from Slovenia to Bulgaria, is flat on its back economically? Boosting those economies, through either additional liquidity or political confidence-boosting measures, would be the best way to help Greek recovery. The Balkan problem is also a growing source of concern for Italy and Austria, not to mention the risk of a resumption of hostilities if political and economic recovery collapses there.
To that end, a few suggestions:

1) Closing the chapters of EU law-conformance in the negotiations between Croatia and Brussels (how about Zagreb speeding up the progress) and arriving at an announcement in 2011 regarding Croatian admission, with a date, would be a good confidence-building measure for that country's economy and beyond.
2) High-level political visits from important European leaders (Merkel, Napolitano, Sarkozy) plus a dash of extra cash here and there to Bucharest would go a long way towards confidence-building in Romania, potentially an economic lomotive in the region, a sort of Balkan Poland. The country is not poor.
3) FIAT's massive investment in Kragujevac, Serbia is more important politically and economically to the region than is generally recognised. A new political initiative to re-integrate Serbia within the European and especially southeast European context is necessary. It is difficult to overestimate the strategic nature of their economy within the Balkan context.
4) Improved relations between Bulgaria and Turkey (encouraged by Brussels) could lead to greater trade/investment between the two, thus aiding the Bulgarian economy.
5) New political initiatives aimed at re-stabilising the Bosnian "polity" and economy are needed - Europe in general, and Italy in particular (my country), are wasting too much time and resources in Afghanistan, while forgetting strategic concerns closer to home.

Valli2 wrote:
May 10th 2011 9:41 GMT

It seems to me that Mr. Juncers is an arrogant man. After all what is the main income of the Luxembourg treasury: It is taxes on the high earnings of people working in various EU institutions stationed within or near Luxemburg´s boarders. Greece amongs other countries pays for this beaurocracy, which Luxemburg profits from. Besides the terms of the loans from the ECB to troubled economies of the Eurozone are such, that this very bank is going to profit on those troubled economies vows. I have never wanted to use the word stupid about other persons, but I´d say that Mr. Junckers is either senile or stupid.

Vanbrugh wrote:
May 10th 2011 10:15 GMT

This article is just depressing. It saddens me to think that we Europeans are led by these bickering children. They are just going to prolong the economic agony for all of us, especially the legions of young unemployed.

Valli2 wrote:
May 10th 2011 10:16 GMT

@ Serious Sam

The only plausible comparison in the size of the public workforce as a proportion of the total workforce in Greece vis a vis Luxemburg, would be to include those working for the EU. I´m sure if you do that, you will find out that workers in the public sector are a much greater proportion in Luxemburg than in Greece and more handsomely paid too. On top of that, Mr. Junckers reighns over a country, which is a tax-heaven par excelence, which can only be matched by those of the UK and US and ofcourse the mainstay of the Russian mafia, Cyprus. I wonder how big a proportion of the levies entering the Luxemburg treasury are profits from criminal activity across the planet. It is more vital for the economy of the world, that those tax heavens be uprooted than allowing the ECB profit from the vows of malgoverned peoples on the periphery of Europe.

May 10th 2011 11:03 GMT

In the seventies Greece was a star performer, economically speaking. Its economy grew as fast as Turkey's and it had a higher GNP per head than Turkey. After joining the EU that its economy was ruined. This isn't an exclusively Greek problem. Ireland and Portugal have also asked for bail-outs. Spain and Italy appear to be struggling too. The problem is federalism. The single currency was tailor-made for Germany because the Germans would only agree to give up the D-Mark if its replacement was a D-Mark look alike.

Federal Europe is unworkable. There is an economic concept known as optimum currency regions (OCR). It was developed by Robert Mundell. The EU is not an OCR. Therefore an external shock, such as the credit crunch, produces different effects in different member countries. Friedman and other economists were sceptical about the euro and its potential for success. In America, where everybody speaks the same language and has sworn allegiance to the US, people in depressed regions can travel to other states in search of employment. In the EU, the Greeks, the Irish and the Portuguese must suffer the terrible consequences of the single currency on their own. Unless they are fluent in German and the Germans are in the right mood to admit millions of immigrants from depressed areas of the EU, that is.

Let nobody complain about Greece's dishonesty with its statistics. They were probably just as dishonest with their bookkeeping when Greece was one of the OECD's fastest growing economies, along with Turkey and Japan. In the EU, every country cheats on its partners. How many eurozone countries are still observing the Maastricht criteria? Not many, right? Let the EU assume responsibility for what happened in the "peripheral economies" and pay damages. By the way, I am NOT Greek.

JoeSolaris wrote:
May 10th 2011 11:06 GMT

@kingtran:

The problem of corruption is hardly limited to Greece. If the Economist printed an article about this 15 years ago, then why were British, French and German banks lending so massively to the country?

In my own experience in Italy with European Regional Development Fund programmes, Brussels hardly turns a blind eye - they are dependent upon collaboration from Regional authorities, but are most aggressive in recent years about investigating fraud and freezing aid (for example in Romania and Bulgaria). There are remedies to government waste and fraud, right? And every country in the world must battle them. But to use this as a pretext to attack the European integration project, to create new divisions in Europe, is unacceptable.

JoeSolaris wrote:
May 10th 2011 11:35 GMT

@Ahmet:

1) Optimum Currency Areas is overblown as economic theory and largely irrelevant to Europe. In the real world political factors weigh heavily on exchange rates, trade and investment. Europe, or western Europe in particular, is too linked to the American economy. In the past, without our unified currency, the Americans could too easily export the cost of their economic follies to Europe.
Currently, the American government is overspending. Without the unified currency, they could export their inflation and unemployment abroad (as they did in the 70's).

2) The unified, stable currency has guaranteed low interest rates all across the continent, sparking economic development in many "hidden" corners of our countries. If you have seen post-Communist central European cities like Prague, Bratislava or Warsaw in recent years, you will have seen a stunning economic development/change in the ten-year period from 1995-2004 (in particular). That same change has occurred across Mediterranean Europe over a twenty-year period from 1986-2005, including Greece. We do not want to lose that, even accepting reforms and temporary austerity measures.

3) The strong euro is overblown as reason for Mediterranean Europe's lack of economic vitality: worldwide exports from all our countries are no worse at euro = USD 1.50 than they were a year ago. However, Greece and Slovenia are suffering because the strong euro plus devaluations across the Balkans have interrupted their normal local trading patterns. If Hungary, Croatia, Romania, Bulgaria were inside the euro (not about to happen tomorrow, but "inevitable" these economic relationships would resume their normal patterns.)

A more plausible reason regards Italy and Greece's excessive debt burden/interest payments and the excessive rigidities of our labour markets and economic legislation (right across the Mediterranean). I am in favour of the trade unions' defence of reasonable wages, but they too need to accept reforms, especially regarding work rules.

4) Language would seem to be a barrier to labour movement - but there are a stunning number of Greeks, Italians, Spanish, Portuguese and Irish people working in England, Germany, France, etc. We Italians have very large numbers of Romanians and Bulgarians working here, while a million Italians are floating around England, with another half million in France and Germany apiece.
Apparently, hunger is the best language teacher.

5) Cheating is not acceptable. The Greeks are now learning this the hard way. Too much of their culture has been based upon demonstrating personal cunningness. The net result of one market actor seeking to cheat another is not strength - it is colonial weakness. Dishonest Greeks once again risk transforming their country into someone else's colony.

6) I would particularly criticise the excessively expensive weapons purchases Greece was encouraged to make by its EU trading partners, which certainly did not help regional stability in the Aegean.

In any case, Greece will make it through. As will the Euro. The ECB is thirteen years old, and any teenager learns by making mistakes.

Lafiel wrote:
May 10th 2011 11:40 GMT

So people are finally going to take serious the minority that said Greece would have to default/restructure or even leave the Euro, after being ignored a year ago? Amusing if I wasn't one of those who can now say "told you so".

@ Valli2:

Uproot those tax haven areas and they will merely find new areas to grow and it may even be outside the EU (then to detriment of the EU). Unless you get every country in the world to agree to the same banking practices and then are able to enforce the rules.

the first one is impossible and the second one is beyond impossible.

Because whatever bank and/or country allows that money to enter their system recieves benefits. Eventualy there is someone who will get more benefits than losses by doing so.

It is same sort of idea that high corporate tax rates make businesses move from California to Nevada or from the USA to Switzerland or Ireland...

JM Fulton Jr. wrote:
May 10th 2011 11:44 GMT

Stop it with the usual financial shell games. Real, down-to-earth action is needed. So, throw out the Goldman Sachs playbook on how to shift and hide debt.
Instead, Greece should do this:
Raise cash to retire foreign debt.
1. Sell state industries and properties. A national yard sale.
2. Issue domestic 'patriot" bonds for Greeks to buy...that includes Greek state, corporate, union pension funds. Greeks should eat their own cooking.
3. Actually perform income tax revisions with fast courts to seize properties f scofflaws who run to SWitzerland.
Any remainder of debt can be subject to the more traditional shift-and-hide methods fo dealing with finance reality.

Lafiel wrote:
May 10th 2011 11:51 GMT

@ JoeSolaris:

"2) The unified, stable currency has guaranteed low interest rates all across the continent,..."

This part I had to laugh at. Investors were idiotic in thinking that every Euro member were now similar to Germany for investment risk due to the common currency and thus other countries were able to pay low interest on their debts.

The game is up and investors now realize that every Euro member is not Germany, and their investments are and never have been as safe as those in German bonds. That is why we see the spreads on the various Euro members now increasing and seperating from the German bond rates...

The era of low interest rates is over for a number of these countries, who have poor fiscal discipline and economic competitivness. They had a decade of unreasonably low interest rates and spent the borrowed money poorly, enabling them to hide their weakness.

The game is up and there is not going to be any more cheap money. The sooner people and countries realize this, the better they can prepare for the future.

Jonas_BsAs wrote:
May 10th 2011 11:54 GMT

Ahh, come on now, Europe. Don't be cheap. Just give'em pigs a little bit more. PIGS: we have all faith in you. And we love you!

enlisted wrote:
May 10th 2011 12:24 GMT

Good article. Today I read in a German newspaper that it is even contemplated to give Greece another 60 bln "bailout".

It is clear that Greece can not come back to the markets to refinance in the foreseeable future. So the premise of the original bailout as it was told the German public, that it is "temporary" help, has proven to be wrong.

With some common sense: the markets didn't lend money to Greece in 2010, why should they in 2011 (,2012, 2013...) when they are even more indebted (and the interest rates of the ECB are maybe higher)?

The same is true for Portugal which has in parts a similar structure like Greece. Portugal has now public debt of around 80% of the GDP which will rise over the next years to almost 100%.

Portugal will not be able to pay the money back as far as I can see. It is not a bailout with loans. It's the transfer union in action.

May 10th 2011 12:33 GMT

Default is impossible.
Restructuring is impossible.
Leaving the Euro is impossible.
But paying the debt is also impossible.

One of these four is going to happen, and it is most unlikely to be the last.

Things are rapidly approaching the point where the impossible becomes inevitable.

JoeSolaris wrote:
May 10th 2011 12:39 GMT

@enlisted:

Yes, Portugal's total debt is now close to 80%. Germany's is at 83%.

Also, yes, the Greeks will probably not be able to return to private markets in 2012 (nobody ever said they would in 2011); with a deficit at 10.6% last year and expected to be under 8% this year, they are only one quarter (three months) behind on their fiscal consolidation programme. This is neither the end of the world nor a need for default. The basic numbers are still moving in the right direction, and their debt is not out of control.

1-20 of 837

About Charlemagne's notebook

In this blog, our Charlemagne columnist considers the ideas and events that shape Europe, while dealing with the quirks of life in the Euro-bubble. An archive of print columns can be found here. Follow Charlemagne on Twitter at @EconCharlemagne

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