Tag Archives: ECB

How Greece inadvertently ducked under the rollover bullet

Ilustration by Manos Symeonakis

When French President Nicolas Sarkozy announced two weeks ago that French banks had agreed to participate in a rollover of Greek debt, it seemed a rare moment of relief in the country’s strained efforts to tackle its fiscal crisis. “The idea is that we won’t let down Greece and that we’ll defend the euro, which is in the interest of us all,” said Sarkozy, reflecting a sense of purpose and unity that the European Union has often lacked over the last 18 months.

However, the French proposal — which we will come to — soared briefly on the wings of hope before crashing into the immovable obstacle of reality. Two days of talks between bankers and insurers last week led to the Paris blueprint largely being discarded. However, the rejection of the French scheme appears to have helped Greece dodge a debt bullet. The more experts scrutinized the French plan, the more they realized it was a seriously flawed proposal that would worsen Greece’s debt problems.

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Like a rolling stone

Illustration by Manos Symeonakis

When she contested the German chancellorship in 2005, Angela Merkel angered the Rolling Stones by using their 1973 hit “Angie” as her campaign theme without the band’s permission. Her dominant role during last week’s negotiations in Brussels, where the eurozone members agreed on financial assistance for Greece, has prompted concern throughout Europe that Merkel is going to make a habit of ignoring others’ wishes.

Apart from the connection with her Christian name, “Angie” was a strange song for Merkel’s campaign team to pick. Maybe they just took a calculated gamble that few Germans would pay attention to lyrics such as: “With no loving in our souls and no money in our coats/You can’t say we’re satisfied,” or “All the dreams we held so close seemed to all go up in smoke.”

These words, however, had a particular resonance over the last few days as Europe appeared to wake up to a new reality in which Germany is no longer willing, as German daily Bild put it, to be “Europe’s paymaster” without shaping the policies that govern how that money is spent. As the German weekly magazine Der Spiegel explained, Merkel’s stubbornness represented a “paradigm shift” for a country that has always been at the heart of European affairs and whose main goal has been not to isolate itself. “Merkel has made it clear that there are German interests and European interests, and that they are not necessarily the same.”

Greece, without any money in its coat, certainly found that Merkel was short of loving in her soul. The German chancellor was adamant that Athens should not be given a cash injection unless it was teetering on the precipice and that the International Monetary Fund should be involved in the bailout. Merkel got her way, and it wasn’t just Greek dreams that went up in smoke. The French had perhaps most cause to be frustrated with her intransigent stance. President Nicolas Sarkozy had been hoping he could lead the EU to new territory – land on which the Europeans could regulate their economic and financial affairs without the help of the Washington-based IMF or anyone else.

The only thing Sarkozy managed to rescue from the dying embers of this grand vision was a commitment for the EU to begin thinking about how the bloc’s economic affairs could be managed centrally. However, even his desire for a so-called EU “economic government” was watered down to “economic governance” in the English wording of the text, largely at the behest of British Prime Minister Gordon Brown who has a May general election to fight and does not want to incur the wrath of British euroskeptics. Sarkozy admitted the plan unveiled in Paris last week was the product of “compromise” but it’s clear he was the one doing most of the compromising. The view in France, where Sarkozy is already on shaky ground, especially after his recent drubbing in regional elections, is that Paris failed to defend its vision of Europe. As leading French economist Jean-Paul Fitoussi told Le Monde daily: “This plan tells the world that Europe does not want to settle its affairs on its own.”

Even in Germany there were some dissenting voices, unhappy that their country had played tug-of-war with other EU members rather than toeing its usual European line. “Up to recently, Merkel has come across as Dame Europe,” said former Vice-Chancellor Joschka Fischer. “Now she seems to have transformed herself into Frau Germania.” But Fischer finds himself in a minority if the reaction of the German press is anything to go by. For most of the media Merkel was neither dame nor Frau but simply Super Angie. “Merkel has won against all odds… the power play has done Europe a favor, putting the profligate on notice that they have to do their homework and at last impose fiscal discipline rather than counting on Europe to keep them in the style to which they are accustomed,” wrote Josef Joffe, publisher-editor of the weekly Die Zeit.

Paul Taylor, an astute observer of European affairs for Reuters, went a step further in analyzing the impact of Merkel’s victory. “The masks have fallen,” he wrote. “From now on, we will all be living in a more German Europe, with economic policy driven by Berlin’s hair-shirt export-or-die model.”

There is no doubt that Merkel’s line in the sand is a significant moment in European affairs but rather than the death-knell for solidarity and cooperation, which it clearly isn’t, we should perhaps see it as another chapter in the ongoing existential tussle that underpins the EU. Since its inception, every single member state, every single leader has had to wrestle with the idea of how much authority, sovereignty and responsibility to hand over from national to European Union hands. No country, not even Germany, is yet comfortable with the idea of sacrificing national interests for European ones. No leader is yet in a position to put the European agenda above a domestic one. Just as Sarkozy and Brown had personal concerns going into last week’s talks, so Merkel needed to stand her ground for domestic reasons. Her center-right coalition’s majority in the upper house is at stake in a May 9 state election in North Rhine-Westphalia and opinion polls have not been favorable.

So, rather than look upon last week’s agreement as a boon for Greece, a defeat for France and a victory for Germany, we should view it as the imperfect but nevertheless tangible outcome of a democratic process the scale of which is unrivalled anywhere in the world. As Lorenzo Bini Smaghi – a member of the European Central Bank’s executive board – admitted, the involvement of the IMF in the aid package was not ideal but was the product of “real politics.” “We live in a world in which second-best solutions are sometimes the most realistic ones,” he said.

It may have been an outcome of an unequal compromise driven by national interests, it may have given the IMF a role in European affairs when it wasn’t absolutely necessary and it may have brought only a vague commitment for better coordinated EU economic management but the Brussels plan is a step toward greater understanding and cooperation between the 27 member states. In a relatively short space of time, the EU has shown it can adapt to fluctuating situations and that there is awareness within the Union that tomorrow’s challenges are likely to require more imaginative thinking and bolder decision-making. Above all though, the commitment made to Greece last week underlines that the EU is still a work in progress – sometimes that progress will be slow, even torturous, but it’s forward motion. And, after all, a rolling stone gathers no moss. Isn’t that right Angie?

This commentary was written by Nick Malkoutzis and appeared in Athens Plus on April 2.

A sum of parts

Ilustration by Manos Symeonakis

“The antidote for 50 enemies is one friend,” Aristotle said and goodness knows how Greece could use that friend right now, as it stares at those disgruntled European faces across the table.

The closest it has come to finding a friend among them is French President Nicolas Sarkozy. The warm embrace he offered Prime Minister George Papandreou in front of the cameras in the Paris drizzle last week was symbolic. He was telling the other Europeans it was time to close ranks around Greece and protect it from itself and, more pressingly, from the destructive nature of international speculators. Sarkozy also reportedly contacted German Chancellor Angela Merkel before the Brussels summit to discuss the possibility of offering Greece concrete assistance.

It’s not the first time that Sarkozy has come through for Greece. At the NATO summit in Bucharest in 2008, he rallied the other major powers to prevent the Former Yugoslavia Republic of Macedonia (FYROM) joining the alliance due to its failure to resolve its name dispute with Greece. The same year, Sarkozy visited Greece, the country from which his maternal grandfather – a Jew from Thessaloniki – emigrated. He became one of only a handful of foreigners to address the Greek Parliament, giving a speech that drew its inspiration from the decades-old slogan of “Greece-France-alliance” but which also contained moving references to his grandfather.

Many Greeks believe their country is worthy of this form of personal relationship with other EU countries. They pine for a union in which their northern neighbors are not obsessed with numbers but show understanding for their often erratic behavior. Greeks would like their European partners to display respect for the country’s history and traditions – we may be crafty devils now but we were once philosophers and poets and our continental cousins should not forget that.

What the last couple of weeks have shown, though, is that in times of crisis, there is little room for personal sentiment. Greece has broken the rules and for all its insignificance on Europe’s economic map, its irresponsibility is threatening to blow the whole show sky high. Ancient gods will not save Greece and the EU now, only some very contemporary fiscal belt-tightening and possibly even financial aid can rescue the situation.

Yet, for all the numbers, indices and percentages that govern Greece’s current relationship with the EU and the European Commission, the country’s headlong plunge into fiscal crisis also poses some profound questions about the Union’s future. While Greeks may deserve to be castigated for their mendacity and incompetence, there is a point at which the EU must decide how to support Greece, unless the very unity and stability of the bloc is not to be put at risk. An unprecedented set of events have brought the EU face-to-face with a dilemma that will define the nature of the Union itself. France’s former Culture Minister and another long-time friend of Greece, Jack Lang, suggested as much last week: “Europeans have a unique opportunity to prove the deeper meaning behind the European Union,” he said. “For our love of Greece, out of our respect for Greek civilization but for Europe itself, we have to act.”

The immediate question for the EU is what form this action should take. For the time being, the eurozone countries have settled for declaring political support for Greece while asking the PASOK government to adopt austerity measures. Both are designed to deter hedge funds and other speculators while bringing the Greek economy within the euro’s deficit and debt boundaries. “This is the worst imaginable punishment for a nation but it is also a consequence of being a member of the European community,” wrote the Suddeutsche Zeitung daily in Germany. “It is only in times of crisis that you see what a system is capable of.”

Also in times of crisis, those who support bold action are usually in a minority: an Emnid poll indicated that 71 percent of Germans oppose giving financial aid to Greece. As the conservative Frankfurter Allgemeine Zeitung put it: “The Greeks are taking to the streets to protest against increasing the retirement age from 61 to 63. Are the Germans now supposed to work until 69 and not 67 so the Greeks can enjoy early retirement?”

Merkel, backed by the Frankfurt-based European Central Bank (ECB) and its president Jean-Claude Trichet has so far rejected a solution that would involve lending money to Greece, arguing that this might stop the government from taking tough measures. The German chancellor instead points to Ireland, which restored market confidence through a program of drastic spending cuts and reductions in public sector wages and pensions. Berlin also argues that a German constitutional court would block any attempt to bail out Greece as this is not permitted under the terms of the Maastricht Treaty that set up the single currency.

They would be valid arguments under normal circumstances but we live in extraordinary times – times in which the dithering of governments, the like of which allowed Bear Stearns and Lehman Brothers to collapse in the fall of 2008, comes at a heavy price. The failure of Washington to act then proved disastrous and very costly. Other governments, including many in the EU, learned from this mistake and pumped billions of euros into the financial system to prevent its collapse.

They now face a similar situation but this time it’s a country, not a financial institution, in danger of going under and pulling others with it. As Jean-Claude Juncker, the Luxembourg Prime Minister who heads the eurogroup said this week, if Greece were forced out of the euro, “the effects would be like an earthquake, uncontrollable.” With the other so-called PIGS (Portugal, Ireland, Greece and Spain) economies suffering problems, Juncker, Merkel and the other EU leaders would do well to absorb the implication of a Greek default, rather than just keeping their fingers crossed it won’t happen.

The threat of contagion means it’s impossible to support the argument that taxpayers in one EU country should not be footing the bill for the economic failure of another. Taxpayers in Britain and Germany had no choice about whether their money was used to keep banks afloat last year – they simply had to accept this was the wisest long-term option.

If the Maastricht Treaty, signed in 1992, does not allow for a bailout then it should be altered. The financial landscape has been reshaped beyond recognition over the last two decades and the EU’s institutions and mechanisms need to catch up.

Also, Greece is not Ireland and cannot be expected to adopt the same measures when there are clear, chronic structural problems that need to be addressed first. Masking this with tax hikes and public sector salary cuts will fool no speculator worth his fat-cat bonus.

The EU has given Greece a month to prove that it can get its economy back on track but the Union has to use this time to consider its own role as well. The Greek crisis is questioning the very purpose of the EU, whose strength has always been, as Aristotle also said, that “The whole is more than the sum of its parts.” But what Europe must now consider is that when one of those parts collapses, the whole is not worth very much at all.

This commentary was written by Nick Malkoutzis and first appeared in Athens Plus on February 19, 2010.