3 May 2010
Greece has reached an agreement with the European Union and International Monetary Fund to secure a massive rescue loan package of €110bn over three years to deliver Athens out of its debt crisis. Greek leaders called on the country to accept deeply unpopular austerity measures in return for help. Eurozone heads of state and government are expected to meet on 7 May “to conclude the whole process,” since the eurozone countries still have to pass the necessary national legislation in order to allow them to transfer the money to Greece.
The Greek troubles began following the revelation that the Greek budget deficit had rocketed to 13.6% last year- debts expected to balloon to €290bn this year. Fears that the rescue plan could stall amid allegations of feet dragging by eurozone partners led credit rating agency Standards & Poor’s to downgrade Greek debt to junk bond status. Despite efforts to tackle its debt crisis by introducing a slew of austerity measures and issuing new bonds to raise capital, Greece has failed to stop the crisis of confidence which had shaken global markets and sent the euro to new lows. Further contagion was feared when Standard & Poor’s also downgraded Portuguese and Spanish government debt.
Athens officially asked to activate the support mechanism agreed earlier by the EU and IMF. The first installment of the eurozone-IMF aid package due on 19 May (€8.5bn) will be paid within weeks.
Essentially the Greek debt crisis has tied the hands of European leaders. German Chancellor Angela Merkel called the bailout “the only way to ensure the stability of the euro”. Along with world leaders, Germany has warned Athens to live up to its promises. Germany is expected to foot the lion’s share of this domestically unpopular aid package. IMF Managing Director Dominique Strauss-Kahn and the European Central Bank President Jean-Claude Trichet had visited Berlin to woo German parliamentarians to back the EU-IMF rescue package. The EU and ECB Presidents have assured that a Greek default or debt restructuring is out of the question. Angela Merkel has expressed hopes to have the approval of the German contribution through Bundestag by this Friday.
Beyond the technicalities of the assistance mechanism, there are some more general questions raised by the Greek crisis. First of all, how will Germany and other eurozone countries “bailout” Greece, if there is a strict “no-bailout” clause in the Lisbon Treaty? Although José Manuel Barroso, President of the European Commission, underlines that payments to Greece would not constitute a bailout, but rather, “coordination of loans”, this is how it is seen by many German taxpayers, 57% of whom consider financial support for Greece to be a “bad decision”, according to a recent poll. The “no-bailout” clause was one of the main arguments put forward in order to convince Germany to adopt the euro in the first place. Now many in Germany believe that they have been cheated when they were told that what is happening now would never occur because of the strict rules of the Maastricht Treaty and the Stability and Growth Pact. With regional elections looming on May 9 in the most populous and economically powerful state of Germany, North Rhine-Westphalia, and the majority in the upper house of parliament at risk, German Chancellor Angela Merkel has to manoeuvre between electoral rallies (“Greece has to accept harsh measures”) and official press conferences intended to calm the financial markets (Germany “feels an enormous obligation towards the stability of the euro”).
In the meantime, the Greek government is under intense domestic pressure, as the protests continue to dog the country. Unions have vowed to resist austerity measures, which include the scraping of 13th and 14th month bonus for civil servants and pensioners. The ECB warned Athens to be ready to make more cuts. This was also stressed by Greek Prime Minister in his televised statement to the nation, where he urged Greeks to accept “great sacrifices,” stressing that he “will do everything not to let the country go bankrupt.”
This leads to the third question about the functioning of the European Monetary Union. Since the establishments of the euro, there have been many cautious voices expressing doubts whether the monetary union can be successful without unified fiscal policy. The Greek crisis has clearly highlighted the need to reform and strengthen the economic governance of the eurozone. However, it is too early to see what concrete measures will be taken. As the lukewarm reaction to the idea of a “European Monetary Fund” has showed, it is not clear yet how much additional sovereignty each eurozone nation is willing to surrender in pursuing more complete economic and monetary union. European leaders are expected to “draw the first conclusions of the crisis for the governance of the Euro area” at their meeting.
Sources and links to further information:
- Greece promised rescue package, but investors wary, Reuters, 3 May 2010
- “Euro area states agree €110bn loan for Greece,” EUobserver, 3 May 2010
- “Europe approves giant Greece bailout,” Channel News Asia, 3 May 2010
- “Greece Takes Its Bailout, but Doubts for the Region Persist,” The New York Times, 2 May 2010
- “Merkel navigates minefield on Greece rescue,” Reuters, 27 Apr 2010
- “Germany underlines its European credentials…,” EUobserver, 26 Apr 2010
- Pisani-Ferry, J., Sapir, A. “Europe needs a framework for debt crises,” Financial Times, 28 Apr 2010 (Bruegel)
- Alcidi, C., Gros, D. “The European experience with large fiscal adjustments,” CEPS Commentaries, 29 Apr 2010