Will Europe finally get its act together and help Greece?

15th March 2010 by Shaun Richards

This weekend saw the Guardian newspaper in the UK proclaim that a bail out for Greece had actually been agreed ahead of the Ecofin meeting which takes place  tomorrow. I then checked the newswires only to discover that the German Finance Ministry was denying that there was any such deal which of course is something of a stumbling block as they are in effect Europe’s paymaster. So several months into this crisis for Greece it would appear that Europe is no nearer a solution as to how to respond with aid for her. Indeed at the moment there appears to be more bickering rather than less. This has been added to by some confusion at the Greek public debt office.

The Suggested Deal According to the Guardian

The euro zone has agreed a multibillion-euro bailout for Greece as part of a package to shore up the single currency after weeks of crisis, the Guardian has learnt

Senior sources in Brussels said that Berlin had bowed to the bailout agreement despite huge resistance in Germany and that the finance ministers of the “euro zone” – the 16 member states including Greece who use the euro – are to finalise the rescue package on Monday. The single currency’s rulebook will also be rewritten to enforce greater fiscal discipline among members.

The member states have agreed on “co-ordinated bilateral contributions” in the form of loans or loan guarantees to Greece if Athens finds itself unable to refinance its soaring debt and requests help from the EU, a senior European commission official said.

Other sources said the aid could rise to €25bn (£22.6bn), although it is estimated in European capitals that Greece could need up to €55bn by the end of the year.

So this is the proposed scope of the plan according to the Guardian. Unfortunately other news agencies in Europe were proposing different plans and the idea of a German state-owned bank KfW being used as a vehicle surfaced again. In case you were wondering  KfW is the Kreditanstalt für Wiederaufbau – a government bank set up post World War Two to finance the reconstruction of Germany. One rather amusing comment on this subject was that if poor KfW got involved you could expect its bonds to be downgraded in eighteen months or so.

So we are back in the situation of wondering who to believe and I will repeat my previous comment that Greece for all of the self-inflicted nature of this crisis is being ill-served by Europe’s politicians who keep claiming that there is a rescue plan then fail to produce one.

France’s Finance Minster Criticises Germany

If there was a deal then all would be sweetness and light between Europe’s politicians one might feel. However Christine Largarde has criticised German economic policy over the weekend in an interview with the Financial Times. In essence she feels that Germany’s improvements in economic competitiveness and her build up of trade surpluses have hurt the rest of the Euro zone. One might think that this would be like criticising a football team for being too good but then she said something quite revealing as she revealed the large flaw in the Euro project

“Clearly we need better convergence.”

Having briefly grasped the real problem she then returned to trying to justify the indefensible. You see Germany could raise her domestic demand and if one is looking at the world economic situation with global imbalances it would help but there is very little reason to think that the Euro zone countries in trouble such as Greece Spain and Portugal would benefit much as their problem is one of a lack of competitiveness. Indeed her comment on Germany’s long-term competitiveness improvement is simultaneously breathtaking and depressing in my view.

I’m not sure it is a sustainable model for the long-term and for the whole of the group

So in essence Germany feels that you can sort out the current crisis but punishing the deficit nations and France feels that the surplus nation (Germany) must adjust. There doesn’t look much sign of agreement there to me.

Germany’s Position

This has been expressed in the suggestion of a European Monetary Fund by Germany’s Finance Minister Wolfgang Schäuble. In essence the German position requires two economic factors to be in play for the Euro. They are fiscal discipline and stable prices. However this means that any country that gets into difficulties is going to be really squeezed and this is before we come to any suggestion of penalties (no not that sort which is so painful to Englishmen in World Cups!) I mean financial penalties.

So Germany is proposing a solution which suits Germany where her sustained improvement in long-term competitiveness leaves her unaffected by her proposed reforms.  If you think about it then this means that Germany does not think that the Euro in its current form is the only way forward, because if she did her plans would contain so sort of help for the countries in trouble, but they do not. There is an implied reform or leave message in her plans.

The real driving force her has been the German Constitutional Court whose rulings have left her politicians nervous of what they can contribute to any rescue plan. This has been added to by statements of men such as Ottmar Issing whose pronouncements are probably now as important as the heady days of 15/20 years ago when markets waited on Bundesbank policy and announcements.

Conclusion and Comment

These two positions seem very difficult to reconcile to me. Whilst the debate goes on Germany continues to improve her economic competitiveness vis-a-vis Southern Europe. Even if they reformed now it would take quite a few years for there to be any real effect so a solution is probably further away rather than nearer.

The fact is that the Euro needed two factors which were missing when she started.

1. Fiscal Union

2. More convergent labour markets (which would help level out competitiveness)

This leads us to two main choices going forward. One is that Europe can become more federalist and have her own fiscal policy which her politicians would clearly love but faces real issues at the extremes where there would have to be fundamental changes not only in the deficit nations but also  the surplus ones. Or the Euro can retreat to a set of countries which converge more.

You may notice that I have implied above that countries like Greece could leave the Euro (or in effect feel that they have been forced out). I still think that this is unlikely but it is no longer impossible. If Germany continues with her strategy then Greece’s loyalty to the Euro will be severely tested and she will not be the only Southern European country to feel this.

Greek Public Debt Office

Whilst politicians are bickering you might hope that officials and civil servants would be getting on with their roles. However on Tuesday last week the Wall Street Journal published that a three-year government bond issue was planned. This was then officially denied with apparently there being no plans to issue anything “soon”. With Greece’s past history with misrepresentations such chicanery is unwise.

10 thoughts on “Will Europe finally get its act together and help Greece?”

  1. David in England says:

    There is another solution, which would be for Germany to leave the Euro.
    That they have not implies that they are benefiting from it as their customers can no longer compensate for increased German competitiveness by devaluing. They may also feel they gain politically as they gain more control over their continent.

  2. Drf says:

    David: I cannot see how that could be a practical solution to the present problems. If Germany left the Euro and reverted to the DMark as many Germans wanted that would surely make the problems for the Euro much greater? In any case those EU states left within the Euro would still not be able to devalue so how would they benefit? The Euro would become weaker in international exchange and that would cause the borrowing costs of the PIGS to become higher.

    There is no real solution for Greece or any other PIGS other than drastically reducing state government spending to calm the markets I think. The UK will soon likely have similar problems.

    1. David in England says:

      If Germany were to leave the Euro the rest of the EZ would be able to devalue in relation to the DMark. That would enforce the cost reductions which I agree are needed and is in fact what UK is trying to do.
      Whether this is practical politics is another matter. Rather this might be used as a ‘creative crisis’ to extend the reach of the EU to include a federal fiscal policy,

  3. Ian says:

    Thanks for the blog, which I find very interesting and insightful. I’d value your take on the idea, which Martin Wolf, among others, is promoting, that Germany’s surplus is as much part of the Eurozone’s problem as the deficits of the Club Med. If Germany exported less to China would that help Club Med? If it imported more from Japan or the USA, would that help? I don’t see how. I guess the idea may be that Germany should import more from the Club Med, but what? Germany can hardly be expected to make her own industries less competitive. Perhaps Germans could spend more time relaxing by the Mediterranean, either on holiday or in retirement, but what else? I suspect the truth is that Germany isn’t pretending she is richer than she is, whereas Club Med (and the UK) are so pretending. Can Germans really be expected to pay to sustain the illusory wealth of others?

    1. Mac says:

      I think that is so obviously the case. As has been stated without political union there are too many sovereign differentials to have effective monetary union. The tail cannot wag the dog doesn’t matter how many politicians would like it to! Each has to attain or at least aspire to attain the benchmark of the best performer anything else is unworkable. Expecting Germany to bale out underperforming countries would cause as much political carnage for themselves as anything we see in Greece at the moment.

    2. Hi Ian
      The truth is that Martin Wolf’s analogy works much better for the world as a whole than it does for Europe. For example overall world deficits and surpluses on trade have to be zero (the numbers are so badly collected however that they could easily give a different result..). In such a scenario if the surplus nations increased domestic demand and the deficit nations exported more then everybody could be better off. In my section on Japan and her circumstances then there are clear domestic reasons for her to follow such a policy. However Japan excepted there is not any great incentive for Germany or China to do the same apart from altruism and talk of the world being a better place.

      Looking at Europe whilst there is an obvious incentive for Germany not to want the weaker nations to collapse I suspect that they are getting tired of being their paymaster. They probably feel that they can export elsewhere if push comes to shove and here comes the real rub are probably wondering how this would help the weaker nations. This is in my view is where this analysis even on a world view is exposed as a mathematical truism rather than a causal mechanism. Unless Greece and the other weaker countries improved their economic performance then the increased domestic demand in Germany or Japan would go elsewhere.

      So in the end I still believe that the weaker countries like Greece,Spain. Portugal etc. and to an extent the UK need to improve their economic competitiveness. Also this needs to happen at least at the same time and preferably before any move from the surplus nations. The problem with this is their history as it would require a fundamental change.

      This means that the surplus is part of the problem but in my view it is a symptom and not a cause of the problem…

  4. Drf says:

    David: I don’t think you seem to have thought through what you are proposing could be possible? If Germany were to leave the EZ and re-establish the Dmark (now totally unlikely), then you would still have the rest of the EZ structure in place, including the ECB. How do you think the ECB could be persuaded to devalue the Euro? Its role is to maintain the value of the Euro.

    No, what you propose would require not only Germany to leave the EZ and re-establish its DM, but it would also require the dismantling of the Euro structural fabric, which if this were done would cause the Euro to collapse on currency markets, since it would then be a currency with no Central Bank and no control against inflation or other debauchery. International investors would then have no confidence in it and the fiscal problems would then be greater than they are now for countries like Greece!

    There is only one solution for profligacy and debt. That is to restore solvency; and this can only be done by stopping the money sink outflow. In other words spending has to be drastically cut to restore solvency, related to actual present revenue.

    As Mac observes here, whilst there are too many sovereign differentials due to the absence of fiscal union, and a failure of adequate ECB control a common currency cannot be successful. We have a similar stricture with sectors with vastly different tax overheads attempting to compete in manufacturing and technology: the West and China. China will always win, until it too gets a Welfare state, and the resultant grossly increased taxes and costs.

    1. Fergus says:

      Or we cut back on welfare spending and make living in Western Europe much more efficient, much cheaper..

  5. Johan_Heuvel says:

    The best option for the other Eurozone members is to expell Greece from the Euro zone on grounds of destabalizing it and frauding its way in and just let Greece go bankrupt. It is not like an earthquake or a Tsunamu just hit them. This is all of their own making. How other nations whished they had all the chances, money, and oppertunities handed to the Greek. The Greek people need to sort themselves out, stop being the corrupt state they are, jail the frauding politicians and get their act together. In the long run this is in everybodies best interest. Bailing them out is just dragging this sad story (Greec tragedy) into another decade of corrupt missery.

  6. Johan_Heuvel says:

    I am not the only one thinking about expelling Greece anymore.
    And I think the Germans just found out their banks do not hold the bad cards:
    Curious who does though. AIG maybe?

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