The euro as we know it may well be facing an existential question, writes ARTHUR BEESLEY
ANOTHER DAY, another meltdown. Not even the promise of €110 billion for Athens is good enough to appease the rampant fear that the problems facing Greece will spread throughout the euro zone.
For the European authorities and the 500 million people they serve, the big question is whether the crisis can be contained. For the euro as we know it – its moorings under threat as never before – this may well be an existential question. Right now, however, the aim is to lance rising pressure on the currency by ensuring rescue aid starts flowing fast to Athens.
“There is a threat of serious contagion effects for other euro zone countries and increasing negative feedback effects for capital markets,” Bundesbank president Axel Weber said yesterday as he urged German parliamentarians to support the rescue effort.
“A Greek default . . . would pose a substantial risk to the stability of monetary union and the financial system.”
Through their indecision, prevarication and U-turns over Greece, European leaders of every hue have raised searching questions about their competence and their power to respond to a sovereign debt crisis. Almost three years into the credit crunch, forces similar to those that felled Lehman Brothers are weighing heavily on the euro.
Five factors are at work, all of them interlinked. First, there is lingering fear that the Greek rescue as framed might not avert eventual default. Second is growing scepticism about the health of the Spanish and Portuguese economies. Third is apprehension that the bungled political response to the Greek debacle points to potential for chaos if a big country such as Spain hits the rocks. Fourth is concern about the fragility of Europe’s economic recovery, 14 of the 16 euro countries being in defiance of their legal requirement to keep their budget deficit below 3 per cent of GDP. The fifth is the exposure of dangerous frailties in the very foundations of the euro system, now shown to be much weaker than the impenetrable fortress its creators planned.
It does not necessarily follow that each of these concerns will push like a domino against another. Each, however, comes riddled with unknowable variables that are as prone to exaggeration in volatile markets as they are difficult to control. And that, in the combustible atmosphere that prevails whenever the financial becomes political and vice-versa, is a recipe for turmoil.
Take the Greek rescue, finally a done deal last Sunday after many months of political bickering. It was only with reluctance that Europe’s leaders intervened, arguing every inch of the way over the scope and scale of the rescue and a possible role for the International Monetary Fund (IMF).
Prime among the doubters was German chancellor Angela Merkel, who said “we’re at a fork in the road” yesterday when seeking parliamentary approval for the aid plan. But we are already far beyond the fork, the moment of crisis triggered late last year when Athens first admitted deceit over its financial statistics. It’s been downhill all the way since, every single effort to keep the country from the abyss proven inadequate. Still in question is whether the loan fund – €1.3 billion of it from debt-reliant Ireland – will see the country through the storm.
Although prime minister George Papandreou can stay away from the public debt markets for 18 months or more, the extent to which wrenching austerity measures will curtail his administration’s capacity to pay interest on its existing €300 billion debt pile is in question. The consolidation effort this year is the equivalent of 6.5 per cent of GDP, something not tried in Europe for more than a generation and a task made even more difficult by the lack of a devaluation lever.
Recession will advance as a result, the contraction this year now forecast by the European Commission to rise to 4 per cent from the previously forecast 3 per cent. The contraction next year would be 2.5 per cent, up from 0.5 per cent in previous projections.
This curtails precious tax revenue, increasing the proportional interest burden as wages, pensions and state services are curtailed. No surprise, therefore, that the latest in a series of general strikes brought tens of thousands of Greeks on to the streets.
Even as the protests claimed their first fatalities, the sense is that tension will only mount as budget cuts and tax increases kick in. The austerity will continue for years to come. Inevitably, the weakest in Greek society will suffer.
Fear that Papandreou will be unable to execute the austerity plan is a further concern. So too is the sense that the fiscal crux will ultimately result in a debt restructuring. This is something Europe is loath to entertain at present, for restructuring occasions default and default within a currency union exposes other sovereign borrowers to fear in markets that their lenders could be next.
It is the same kind of worries that have Spain and Portugal under pressure, the concern amplified by credit rating downgrades as their requirement for debt rises. Time and time again we are told that no other euro country is in Greece’s parlous condition, calming remarks yesterday from economics commissioner Olli Rehn being but the latest attempt to reassure markets. Spain needs no rescue, said Rehn, echoing the country’s prime minister José Luis Zapatero. That Zapatero called the international media to a press conference two days ago simply to quell a rumour about Spain’s solvency illustrates just how fraught the atmosphere is. Indeed, well-informed political sources in Brussels attribute Merkel’s move last week to back the Greek bailout to an unexpected downgrading of Spain by rating agents Standard Poor’s.
For all his positive talk, Rehn cannot put gloss on “worryingly high” deficit levels throughout the EU. “In order to safeguard the economic recovery, which is still rather modest and somewhat fragile, it’s absolutely essential to contain the bushfire in Greece so that it will not become a forest fire and a threat to financial stability for the European Union and its economy as a whole.”
Europe’s leaders fight to convince their many doubters that they have at last found a way to overcome potential chaos. They have yet to demonstrate that they can.
Arthur Beesley is Europe Correspondent