GREECE'S REQUEST for a financial lifeline from its euro zone partners and the International Monetary Fund (IMF) presents the euro with its biggest challenge – one also certain to test the solidarity of the European Union. Greek prime minister George Papandreou, in seeking assistance, said yesterday that it marked "a new Odysseyfor Greece"; one in which both his country and the EU enter uncharted waters.
In Homer’s epic poem, Odysseus took 10 years to return home to Ithaca. And Greece may now have to endure a decade of austerity measures before its public finances are brought back into balance.
Since the 1970s, when the UK and Italy did so, no western European country has asked for IMF support. Today Greece finds itself in a far more difficult position. As a euro zone member, it can neither devalue its currency nor raise interest rates. Greece has contributed to its own difficulties by – as its prime minister has acknowledged – a culture of “systemic corruption”. But Greece has not been helped by the failure of euro zone members to put a bailout arrangement in place sooner, and with greater conviction. Weeks of delay, uncertainty and squabbling preceded the agreement on financial support for Greece. Time lost only served to raise the cost of Greek borrowing. By Thursday its debt cost three times as much to finance as German debt, its credit rating was again lowered and Eurostat, the European Statistical Agency, revised upwards Greece’s 2009 budget deficit.
Greece’s financial rescue has come at an inopportune time. Eurostat has also revised Ireland’s budget deficit to 14.3 per cent of GDP, the highest in the EU. The €4 billion recapitalisation cost of Anglo Irish Bank last year was viewed as spending rather than investment. The Economic and Social Research Institute (ESRI) recently estimated €25 billion as the “possible” net cost of recapitalising the Irish banks, most of which will be invested in Anglo Irish Bank. Although this statistical adjustment involves no extra cash cost, the higher headline deficit may mean that Ireland takes longer to reach the EU budgetary deficit limit of 3 per cent, or must move faster to do so by the 2014 deadline.
No country has paid a higher price than Ireland to save its domestic banks and so avoid a financial collapse. As such the IMF’s proposals to ensure the world’s major economies are better prepared to handle any future financial crisis are of major importance. This weekend in Washington the Group of 20 finance ministers will discuss the IMF’s proposals for two global taxes. These would involve a levy payable by all financial institutions – not just banks – and a tax on their profits and their pay. But unless most major countries agree on a co-ordinated approach, those that tax banks and bankers’ bonuses could find themselves at a serious competitive disadvantage. Firms in the financial sector could easily relocate to a jurisdiction with lower taxes and lighter regulation. In that respect, the IMF is best placed to win international support and agreement for an overdue reform of the global financial sector.