ANALYSIS:The EU (for which read Germany) will not let Greece go to the wall . . . for the sake of the euro, writes ARTHUR BEESLEY
THE DEAL was done in the hours before European leaders sat down to their summit lunch at the Bibliothèque Solvay, an ornate 19th century library set on a snowy park near the EU quarter in Brussels. It wasn’t quite a bailout for Greece, but the next best thing, a pledge that Europe would help if required. The Earth still moved.
Brian Cowen and his EU counterparts had come to the gathering at the invitation of Herman Van Rompuy, the former Belgian prime minister who was hosting his first summit as president of the European Council.
Van Rompuy convened the conclave to debate a new medium-term economic plan for the union. Events on the financial markets forced their hand, however, leading to an ad hoc expansion of the EU’s economic remit.
“Euro area member states will take determined and co-ordinated action if needed to safeguard stability in the euro area as a whole. Greece did not ask for any financial support,” Van Rompuy told reporters. With European Commission chief José Manuel Barroso standing beside him, Van Rompuy’s utterance took the EU through a Rubicon.
Although his statement was bereft of specifics as regards the bailout mechanism or timing, the message was clear enough. Come the evil day of threatened sovereign default, the European authorities would intervene to prop up a euro zone country. Faced with the greatest challenge to the euro since the single currency was established in 1999, Europe has all but defied the “no bailout clause” at the core of monetary union.
The message was crafted by many hands in a series of hectic meetings in the run-up to the summit, as the EU’s most powerful leaders took action to avert the threat of relentless downward pressure on the euro.
Prime among them was German chancellor Angela Merkel, without whose support the initiative would not have flown, and Nicolas Sarkozy, the French president. Although the exact bailout mechanism that may be deployed in the hour of need remains uncertain, it seems likely that the fiscal might of the two biggest euro zone members will be called upon.
Neither would it take flight without the imprimatur of Jean-Claude Trichet, chief of the European Central Bank, who dashed to Brussels from Sydney to take part in the talks. Also in the frame were Barroso and Jean-Claude Juncker, the Luxembourg prime minister who heads the euro group of finance ministers.
Merkel’s own remarks yesterday morning summed up the thrust of events. Greece “will not be left on its own, but there are rules and these rules must be adhered to”, she said. In essence, Greece is still being encouraged to correct its vast deficit without external assistance, but it now has a back-stop guarantee against default. With a €50 billion borrowing requirement, the bulk of which must be raised before June, the country is deep into the financial danger zone.
For Cowen and his Government – who are still in the early phase of a years-long austerity programme – all of this illustrates the gravity of the forces at work in the current malaise.
For the euro system and the institutional architecture that supports it, it is seismic. While the parameters of any bailout remain in some doubt, informed sources say the most likely mechanism would be the extension of bilateral loans from France and Germany or a wider group of stronger EU countries. To discourage other governments from caving in to domestic pressure over efforts to stabilise their finances, it is a given that any EU rescue package would come with stringent policy instructions from Brussels.
Still, the hope at this point is that the Greeks will be able to contain the rot. “This is about generating confidence in the stability of the euro zone,” said a European official. “It’s also about spin: spinning markets, debt-rating agencies and the press.”
For all that, however, the door is now open for exceptional European support for any struggling member of the single currency. Although it is easy to conceive of special mechanisms being developed within the letter of EU law, any such aid is not in keeping with the spirit of the old rules.
The no bailout clause was included alongside strict fiscal rules to help impose economic discipline on euro zone countries, leaving governments with shaky finances without recourse to easy aid from the European Central Bank.
The overriding objective was to solidify the euro’s own foundations, the thinking being that even irresponsible governments would be kept in check by the lack of a rescue tap. This was crucial, for recent experience shows that contagion risk is just as potent a danger in the world of public finances as it is in private business.
For a decade or so, the system more or less worked. Now, cracks are spreading, thanks to the financial emergency in Greece. On its own, Greece may not have shaken the edifice to the extent that we have seen. The country is, however, but one of several vulnerable euro members, Ireland included. As pressure on Athens escalated in recent weeks, speculators turned their eyes on Spain and Portugal. The smell of contagion was in the air.
“It’s an attempt to fudge. They have to move between what’s in the treaty, where an outright bailout is not possible, and something which is still concrete enough to reassure the market,” said Daniel Gros, director of the Centre for European Policy Studies in Brussels.
“It’s likely to be enough in the short run. Then the decisions are out of the politicians’ hands in Europe and into the hands of politicians in Greece. The question now is whether internally in Greece the adjustment programme goes through and whether, if you don’t mind, Greece can do an Ireland.”
George Papandreou, the Greek prime minister, looked preoccupied as he strode up the red carpet to the Solvay building yesterday. Charming and articulate, but under pressure like no other premier on the European scene, he had the bearing of an errant pupil heading for a severe dressing down in the headmaster’s office.
A day previously, Papandreou had been to Paris for a private meeting with Sarkozy. He has travelled relentlessly trying to win favour in Europe’s capitals, constantly repeating the mantra that his Socialist administration has the gumption and guts to do what it needs to do to put its fiscal house in order. But Europe has steadily lost patience with Greece, its credibility eroded by bogus statistics, rampant corruption and widespread tax evasion.
Although he came to power only last autumn, Papandreou faces enormous challenges to stabilise the Greek public finances. In a country which has a history of violent protest, any austerity programme is risky. Even as Papandreou and Sarkozy spoke, thousands of public servants and pensioners were protesting on the streets of Athens and Thessaloniki, the country’s second city. Further protests are planned in a fortnight.
While EU leaders hope they will not have to make good on the explicit guarantee now offered, they have waived the rules on what was designed to be an impenetrable fortress.
Arthur Beesley is Europe Correspondent