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Greece pays a high price for complacency
14 February 2010 By Pat Leahy, Political Editor
The bailout of Greece agreed by European leaders in Brussels last week will lead to significant extension of the EU’s powers.
Future Greek budgets are likely to be subject to unprecedented oversight by officials from the European Commission.
Sources in Brussels and Dublin agreed this weekend that the Greek rescue would represent a significant diminishing of Greek economic sovereignty.
One Irish government official familiar with the negotiations that took place last week said that the Greek government was furious at assertions that its national budgets would, in future, be subject to outside approval.
‘‘The Greeks are really angry about this," the official said. ‘‘They will be made to implement measures that they would have to bring in anyway, but now everyone knows they’ve lost control. But there’s no such thing as a free bailout."
There is understanding but not much sympathy for Greece, according to Brussels insiders. All countries have been hit by the financial crisis and the ensuing recession, but only a few are facing the sort of fiscal Armageddon that the Greeks now need the EU’s help to avoid.
In fact, the response of the Greek government last year to the emerging catastrophe in its public finances would have been comical were it not so serious. The initial response was to pretend that the problem didn’t exist, and to cover it up by falsifying the state’s own statistics. Deficit? What deficit?
The revelation, last autumn, that the Greek deficit was more than twice the original projection caused the price of the country’s borrowing to soar.
It also threatened its ability to finance future debt – a pressing matter which includes the €25 billion that the country must refinance in the April-May period.
Generally, countries do not actually repay their debt, but keep rolling it over and paying the interest.
But without an EU guarantee, rescue package or outright loans for fresh debt, the markets are likely to judge that Greek debt is a bad bet.
This would precipitate the financial collapse of a eurozone member – something which could not be countenanced politically or economically.
So the EU – with Germany as chief paymaster – will rescue the Greeks. But not for free. A fundamental change is taking place in the EU and the eurozone. This is the payback for the protection of the strong currency.
The interplay of politics and economics is different in every country, and on every stage. The Greek government is attempting to implement its own austerity package in the teeth of street protests and strikes.
‘‘Jaysus," said one Labour Party source last week, ‘‘the Greek Siptu have petrol bombs."
But the markets aren’t buying it. The spread on Greek bonds – ie the cost of Greek borrowing – continues to increase.
It seems it will take German cash and EU oversight to do that. This level of direct supervision of a member state’s finances is something that the EU has never attempted before.
In Germany, however, the idea of funding a Greek bailout is not popular. One poll published last week found that 71 per cent of Germans were against the idea.
One newspaper editorialised: ‘‘Germany is meant to take responsibility for Greek debts – that’s not how the idea of the euro was sold to the Germans."
OtmarIssing, the German former chief economist of the European Central Bank, told television news that Greeks enjoyed ‘‘one of the most luxurious pensions systems in the world’’. It was, he said, unreasonable to expect German taxpayers to fund it.
For Ireland, there is some satisfaction that we have been decoupled from the Greeks, Portuguese and Spanish, but also a warning of the price that would be extracted by Germany for any bailout of this country.
The Department of Finance is particularly conscious of this. ‘‘The first thing they [the Germans] would do is say, ‘Um, those tax rates look a bit low, they’ll have to go up’," said one official. And there would be little that an Irish government could do but accept it.
In the meantime, Ireland serves as an example to the debt-threatened countries of the Mediterranean. Brian Cowen has few reasons to feel smug these days, but the Taoiseach would hardly be human if he did not allow himself some small element of self-congratulation at last Thursday’s crisis meeting of European leaders in Brussels.
Brian Lenihan may experience the same feeling at meetings of the eurozone ministers tomorrow and the EU finance ministers on Tuesday.
If they choose, Lenihan and Cowen can tell their colleagues that, ultimately, stabilising the public finances is a matter of political will – and, they might add, of taking the political consequences. Angela Merkel and George Papandreou will be listening.
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