ANALYSIS:The EU appears to be preparing an aid package for Greece as an alternative to IMF intervention
RESPITE AT last, but at great cost. After introducing a third set of unsparing austerity measures in as many months, Greek premier George Papandreou has finally convinced top European officials that his administration is seriously tackling its gargantuan budget deficit.
The question now is whether he can extract exceptional support from the EU as his government strives to borrow more than €50 billion this year to keep the administration afloat and refinance debt. The issue looms large as Papandreou prepares to meet in Berlin today with German chancellor Angela Merkel, whose country would be the biggest likely participant in any rescue deal.
Merkel is still hanging tough. Faced with opposition in her own coalition to any bailout and conscious that enormous political and moral pressure has already yielded significant concessions from Papandreou, she is still clinging to the mantra that bailout talk is redundant because Greece must help itself.
There is, after all, the crucial question of moral hazard, rewarding bad behaviour with special treatment. For Merkel particularly, there is also the stinging political conundrum created by her moves to increase the German pension age to 67, while some Greeks qualify for pensions in their 50s. It’s not the only one.
Nevertheless, events seem to be moving rapidly in the direction of an aid package. While exchanges to date stand as something of a cat-and-mouse encounter for enormous stakes, the endgame is nigh.
For all the unpalatable aspects of an EU bailout – it would be a first, therefore setting a precedent – the argument goes that such an intervention would be a lesser evil than a full-blown sovereign debt crisis in the euro area.
Greece is a minnow in economic terms and might well have been excluded from the single currency. Unavoidably, however, its troubles threaten to contaminate bigger currency members such as Spain, whose public finances are in the instability zone.
This was the thinking when the leaders of the EU’s 27 member states made a promise of determined and co-ordinated action to help Greece “if needed”. That was less than a month ago. Such concerns haven’t gone away. The sense now pervades that this is the moment of truth for the euro.
It seems unlikely now that the European Central Bank (ECB) would participate directly in any rescue – EU law prohibits that. Still, the Frankfurt-based institution has been deeply involved at a conceptual level in talks on the mode of any intervention. The most likely option is for state-owned banks led by German organisations to buy up bonds from Greece, using them as collateral with the ECB.
Days after Greece received its guarantee from Europe’s leaders, EU finance ministers came down heavy on Papandreou’s finance minister George Papaconstantinou with strident demands for a fresh dose of austerity.
Papaconstantinou resisted, claiming Athens had already done enough to tame the bloated deficit. It wasn’t convincing for a moment, but he won 28 days’ grace under threat of cutbacks and tax rises being imposed on Athens by the combined forces of the European Commission and EU governments.
Athens yielded to the inevitable on Wednesday – almost a fortnight out from delivery day in Brussels – with a further round of measures totalling €4.8 billion. Urged for months to do as Brian Cowen and Brian Lenihan did in Dublin, the totality of Papandreou’s measures are said by some to exceed Irish austerity measures. Promises are one thing, of course. Yet, even as Greek trade unions prepare to take to the streets again, Papandreou has little choice now but to deliver the goods. In return, however, he wants the EU family to step forward with help.
The logic in Athens is that external aid would cushion the economic impact of the budget measures and bat off the unwanted attention of speculators who have had a high time of it betting against Athens.
While Greece saw strong demand for a key bond issue yesterday, the fact remains that the country is paying penalty interest rates on its rising debt. EU support, if received, would dampen bets against the country and lessen the interest burden. That it would come at a grave cost is a given. But Papandreou is already wading deep in that murky water.
He warned late last year that his country’s future as a sovereign state was on the line. Scarcely a day has passed since then without demands for more draconian measures from Europe’s top authorities and threats of external intervention.
The din calmed a little two days ago. Hence today’s engagement with Merkel takes place against a different backdrop. The same goes for his imminent meeting with French president Nicolas Sarkozy and a trip to Washington next week to visit US president Barack Obama.
Although Papandreou may well receive much-needed moral support from the White House, the real action is taking place back home in the old continent.
To strengthen his hand in the bargaining, he has let it be known that he is prepared to call in the International Monetary Fund (IMF) if Europe doesn’t step forward. He would not be the first EU leader to do so since the onset of the financial crisis.
He would, however, be the first to do so in the euro zone, something he knows would not play well with the European leaders he is trying to win over.
This is an important lever, for an IMF intervention in the euro zone would compromise the single currency fortress, implicitly weaken the ECB’s independence and cast the pall of impotence over the EU authorities and the union’s wider economic system.
ECB chief Jean-Claude Trichet came down heavily yesterday against any IMF intervention in Greece. His views are shared in Brussels.
Trichet is too wily a man to say so directly to Merkel in a public forum, but he has all but given the nod for some form of exceptional support. The EU leaders’ pledge of special support for Greece was “very important”, he told reporters. Although multiple interpretations are always possible when central bankers talk, his words seemed clear enough.
Arthur Beesley is Europe Correspondent