ANALYSIS: The problem of Greece and its failure to introduce reform is just one that is no nearer being resolved than ever
ANOTHER SUMMIT, another treaty.
European leaders may have struck their deal last night on a fiscal pact to reinforce budgetary discipline in the euro zone and beyond, but huge questions remain over their response to the debt crisis.
The treaty, an unloved creation inspired by German chancellor Angela Merkel, will make it considerably harder for errant governments to evade the uncompromising strictures of Europe’s economic rulebook.
Yet this is for the future, a gilded time in which leaders of all hue in all countries are supposed to balance their budgets and keep them balanced forever no matter what happens in the political world. Fancy that? On its own, this agreement will not lead us to rectitude. There is nothing in the document to address the dogmatic quarrels over Greece and the schism over the size of the firewall. These stark questions remained unanswered as prime ministers, presidents and chancellors made their way home last night after their first Brussels conclave of the year. The same questions, more or less, have swirled since the start of 2010.
There were eight summits last year, seven the year before. Through it all we have heard declaration after declaration of the leaders’ unwavering intent to surmount the debacle that has befallen them. Time after time, however, they have delayed the reckoning.
The new treaty brings with it clear potential for strife and confrontation when the debt brake kicks in, but this is as nothing compared to the fundamental riddles posed by the economic collapse in Greece and the increasingly fundamentalist responses to them.
More than six months have passed since EU leaders accepted that Greece would need a second international bailout and resolved, as a condition of further aid, to seek a large contribution from its private creditors. The objective was to avert a catastrophic default in Athens. For added protection, a big increase in Europe’s bailout funds was mooted.
The plan crystallised in October with a tentative agreement to provide a further €130 billion in rescue loans to the country, alongside a €100 billion contribution from private bondholders and €50 billion in proceeds from Greek privatisations.
The core objective was to cut the size of Greece’s national debt from 160 per cent of national output to 120 per cent by 2020, twice the limit set out in EU law and the new treaty but something which might (just) give the Greek economy a chance of redemption.
Thanks to the onward grind of recession in the country, however, all elements of this initiative are now under severe strain.
The government and its private creditors are still bickering over the terms of the debt haircut. As a result, EU leaders scheduled no formal discussion on Greece yesterday. This may have to await their next summit at the start of March, the same meeting at which they are due once more to debate the firewall.
This is tricky stuff. While a deal with the bondholders may yet come this week, it is generally accepted by now that the arrangement will still leave Greek debt somewhere between 125 and 127 per cent. This is to say nothing of the delayed privatisation initiative, which is going nowhere, raising consequent questions over tens of billions of euro in the October proposal.
The upshot of all this is that the plan may well run foul of the internal rules of the International Monetary Fund, which prevent it from lending to countries whose debt is not sustainable. This helps explains the clamour from the IMF for the European Central Bank to take a loss on the Greek bonds it holds and a public acknowledgement from the EU economics commissioner, Olli Rehn, that Greece is going to need a lot more public assistance. For the ECB and Germany alike, this is no-go territory.
Also in the mix is deep frustration in Europe at the failure of the Greek authorities to implement the reforms set out in its rescue plan. No one can say with certainty whether this is down to political failings or the inability of the Greek public administration to respond in any meaningful way to direction from on high.
Either way, the debate turned toxic at the weekend when it emerged that Germany wants a European budget commissioner sent to Athens with powers to override the government’s budgetary policy to ensure adherence to the plan.
Predictably enough, this goes down very badly in Greece and beyond. “There is a certain line between advice, stronger recommendations and stronger warnings. There is a line between that and actually having your country run for you by somebody else,” says a senior diplomatic source.
Still, Germany’s latest intervention underscores a glaring sense of suspicion and doubt when it comes to Greece. Berlin is not alone here, even if its prescription rankles with others. While this lack of confidence makes a deal to avert default more difficult, it also feeds into Germany’s reluctance to back a big expansion of the bailout funds.
This, in turn, foments ever-present fears of an accident on the markets or the political stage which sets off a self-reinforcing cycle of contagion.
Notwithstanding Europe’s confidence in Italian premier Mario Monti and Spain’s Mariano Rajoy, no one suggests the improvement in their borrowing costs heralds the end of the affair.
With all of that bearing down on Europe’s leaders, it is tempting to see the fiscal treaty as something of a sideshow. After years of meandering debate over the Lisbon treaty, this agreement smacks of negotiation at the speed of light in Brussels terms. The problem remains that it provides no basis to fast-forward into a fearless new world.
At the highest levels in Europe, the big question remains as to whether the pact provides a premise for Dr Merkel to embrace eurobonds and increase Germany’s commitment to the bailout funds.
There is some hope that that may prove to be so in the end, but her government’s zealous agitation on the Greek front suggests she is not in a mood to tolerate any laxity. There’s some way to go yet.
