This weekend saw the Guardian newspaper in the UK proclaim that a bail out for Greece had actually been agreed ahead of the Ecofin meeting which takes place tomorrow. I then checked the newswires only to discover that the German Finance Ministry was denying that there was any such deal which of course is something of a stumbling block as they are in effect Europe’s paymaster. So several months into this crisis for Greece it would appear that Europe is no nearer a solution as to how to respond with aid for her. Indeed at the moment there appears to be more bickering rather than less. This has been added to by some confusion at the Greek public debt office.
The Suggested Deal According to the Guardian
The euro zone has agreed a multibillion-euro bailout for Greece as part of a package to shore up the single currency after weeks of crisis, the Guardian has learnt
Senior sources in Brussels said that Berlin had bowed to the bailout agreement despite huge resistance in Germany and that the finance ministers of the “euro zone” – the 16 member states including Greece who use the euro – are to finalise the rescue package on Monday. The single currency’s rulebook will also be rewritten to enforce greater fiscal discipline among members.
The member states have agreed on “co-ordinated bilateral contributions” in the form of loans or loan guarantees to Greece if Athens finds itself unable to refinance its soaring debt and requests help from the EU, a senior European commission official said.
Other sources said the aid could rise to €25bn (£22.6bn), although it is estimated in European capitals that Greece could need up to €55bn by the end of the year.
So this is the proposed scope of the plan according to the Guardian. Unfortunately other news agencies in Europe were proposing different plans and the idea of a German state-owned bank KfW being used as a vehicle surfaced again. In case you were wondering KfW is the Kreditanstalt für Wiederaufbau – a government bank set up post World War Two to finance the reconstruction of Germany. One rather amusing comment on this subject was that if poor KfW got involved you could expect its bonds to be downgraded in eighteen months or so.
So we are back in the situation of wondering who to believe and I will repeat my previous comment that Greece for all of the self-inflicted nature of this crisis is being ill-served by Europe’s politicians who keep claiming that there is a rescue plan then fail to produce one.
France’s Finance Minster Criticises Germany
If there was a deal then all would be sweetness and light between Europe’s politicians one might feel. However Christine Largarde has criticised German economic policy over the weekend in an interview with the Financial Times. In essence she feels that Germany’s improvements in economic competitiveness and her build up of trade surpluses have hurt the rest of the Euro zone. One might think that this would be like criticising a football team for being too good but then she said something quite revealing as she revealed the large flaw in the Euro project
“Clearly we need better convergence.”
Having briefly grasped the real problem she then returned to trying to justify the indefensible. You see Germany could raise her domestic demand and if one is looking at the world economic situation with global imbalances it would help but there is very little reason to think that the Euro zone countries in trouble such as Greece Spain and Portugal would benefit much as their problem is one of a lack of competitiveness. Indeed her comment on Germany’s long-term competitiveness improvement is simultaneously breathtaking and depressing in my view.
I’m not sure it is a sustainable model for the long-term and for the whole of the group
So in essence Germany feels that you can sort out the current crisis but punishing the deficit nations and France feels that the surplus nation (Germany) must adjust. There doesn’t look much sign of agreement there to me.
This has been expressed in the suggestion of a European Monetary Fund by Germany’s Finance Minister Wolfgang Schäuble. In essence the German position requires two economic factors to be in play for the Euro. They are fiscal discipline and stable prices. However this means that any country that gets into difficulties is going to be really squeezed and this is before we come to any suggestion of penalties (no not that sort which is so painful to Englishmen in World Cups!) I mean financial penalties.
So Germany is proposing a solution which suits Germany where her sustained improvement in long-term competitiveness leaves her unaffected by her proposed reforms. If you think about it then this means that Germany does not think that the Euro in its current form is the only way forward, because if she did her plans would contain so sort of help for the countries in trouble, but they do not. There is an implied reform or leave message in her plans.
The real driving force her has been the German Constitutional Court whose rulings have left her politicians nervous of what they can contribute to any rescue plan. This has been added to by statements of men such as Ottmar Issing whose pronouncements are probably now as important as the heady days of 15/20 years ago when markets waited on Bundesbank policy and announcements.
Conclusion and Comment
These two positions seem very difficult to reconcile to me. Whilst the debate goes on Germany continues to improve her economic competitiveness vis-a-vis Southern Europe. Even if they reformed now it would take quite a few years for there to be any real effect so a solution is probably further away rather than nearer.
The fact is that the Euro needed two factors which were missing when she started.
1. Fiscal Union
2. More convergent labour markets (which would help level out competitiveness)
This leads us to two main choices going forward. One is that Europe can become more federalist and have her own fiscal policy which her politicians would clearly love but faces real issues at the extremes where there would have to be fundamental changes not only in the deficit nations but also the surplus ones. Or the Euro can retreat to a set of countries which converge more.
You may notice that I have implied above that countries like Greece could leave the Euro (or in effect feel that they have been forced out). I still think that this is unlikely but it is no longer impossible. If Germany continues with her strategy then Greece’s loyalty to the Euro will be severely tested and she will not be the only Southern European country to feel this.
Greek Public Debt Office
Whilst politicians are bickering you might hope that officials and civil servants would be getting on with their roles. However on Tuesday last week the Wall Street Journal published that a three-year government bond issue was planned. This was then officially denied with apparently there being no plans to issue anything “soon”. With Greece’s past history with misrepresentations such chicanery is unwise.