A half-hearted effort

EU summit on Greece

A half-hearted effort

Vague European promises of “solidarity” with Greece may not be enough

Feb 11th 2010 | BRUSSELS | From The Economist online

Reuters

 

 

“PRETTY catastrophic”. That was the verdict of a depressed-looking diplomat, at the end of a Brussels summit on Thursday February 11th that saw European Union leaders issue a ringing, but alarmingly vague, pledge of “determined and co-ordinated action” to preserve the euro zone from the risk of a Greek sovereign default.

 

The vagueness of the bail-out promise was no mystery. After years of footing the bills for successive Euro-crises, Germany is in a truculent mood. Of the 16 countries that share the single currency, most came to Brussels ready to spell out, in some detail, how they might come to the aid of Greece, without breaching “no bail-out” rules that prevent the EU from assuming the debts of countries in the euro zone.

 

Leaders had originally been summoned to Brussels for an “informal” summit about ways to make Europe more dynamic. But they knew the markets would react badly if they met without offering a strong signal of support for Greece, in the eye of a storm since the incoming government of George Papandreou admitted that the country’s budget deficit had been massively understated, and in fact exceeds 12% of GDP.

 

There had been talk of bilateral loans from rich countries, accelerated payments of EU structural funds or special loans guaranteed by the EU.

 

But the German chancellor, Angela Merkel, would not—or could not—endorse anything more than a political declaration that the euro zone is throwing its weight behind Greece. This offer of “solidarity” was made in exchange for Greek pledges to cut its budget deficit by 4% this year by enforcing harsher austerity measures than expected.

 

Officials briefed on the leaders’ talks said that Mrs Merkel talked of constitutional hurdles that made it hard for Germany to offer Greece bilateral aid. She also expressed scepticism about Mr Papandreou’s deficit-reduction plans and led calls for Greece to submit to unprecedented monthly monitoring of its public finances by the European Central Bank and the International Monetary Fund.

 

There was a strong whiff of politics in the air. German voters have been paying more than their fair share for European construction for years. Germany’s big fear when it abandoned the deutschmark, just over a decade ago, was that it would end up rescuing more profligate countries in the euro zone. Now those fears are coming true.

 

Politicians from Mrs Merkel’s junior coalition partner, the pro-business Free Democratic Party (FDP), have expressed scepticism that what Greece needs is more money from the EU, after wasting billions from Brussels on a bloated public sector, corruption and uncompetitive enterprises. Speaking in parliament in Berlin on the summit eve, Frank Schaeffler, a deputy FDP finance spokesman, said an alcoholic is not helped “by being given another bottle of schnapps.”

 

Yet money will almost certainly be found for Greece, if it is needed. German and French banks hold tens of billions of euros in Greek debt, and a default could spread contagion among other vulnerable economies in the euro zone, including much larger countries such as Spain. For the moment, EU leaders appear to be gambling that a political statement of support will be enough to make markets back off.

 

In a joint press conference with Mrs Merkel, the French president, Nicolas Sarkozy. said euro-zone countries were offering “solidarity” in exchange for Greek promises of “rigour and transparency”. This would give Greece’s promises vital “credibility”, he said. Challenged on the lack of detail in the summit declaration, Mr Sarkozy said “speculators should understand” that Europe had agreed a strategy for defending the euro zone, and “we will come up with tactics as needed.”

 

That swipe at speculators probably offers a hint about the political tactics that Mrs Merkel and other leaders may employ to sell any Greek bail-out to voters. Already, politicians including José Luis Rodríguez Zapatero, the Spanish prime minister, have portrayed market pressure on their countries as part of a broader plot by murky market forces that want to destroy the euro and fight off tougher financial regulation within the EU. Expect to hear more about European political solidarity versus the speculators.

 

Sceptical commentators in places such as America and Britain have long underestimated the political will within the euro zone to defend the single currency, which was always as much a political as an economic project. Both Mr Sarkozy and Mrs Merkel said at the Brussels summit that the current economic crisis had generated support across the EU for much closer co-ordination of economic policies. Both talked about moving towards an “economic government” for Europe. But those words are empty: they mean one thing to Germany and other governments wedded to budget discipline and strict independence for the ECB and something very different to more interventionist countries like France.

 

EU leaders may have underestimated the political risks they are running by taking on direct responsibility for rescuing Greece in exchange for tough austerity measures, with IMF officials playing only a technical role as advisers. The EU has been popular in Greece up to now, where it is often more trusted than the national government. The IMF is used to being hated in countries where its technocrats step in to rescue bankrupt governments. The EU may soon learn what that feels like.

 

 

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