Euro Brinkmanship Escalates As ECB Shuts Door On Greek Bail-out
The European Central Bank has given its clearest warning to date that there will be no EU bail-out for Greece if it fails to control its spiralling deficit, raising the stakes in a game of brinkmanship over the future of the euro.
Dark clouds pass over a semi-sunlit Parthenon temple atop the ancient Acropolis Hill in Athens
Jurgen Stark, the ECB’s chief economist and the powerful German member on the bank’s inner council, said Greece’s problems are entirely “home-made” and do not meet the terms required to trigger the rescue mechanism under EU treaty law, which is limited to countries that face severe difficulties “beyond their own control”.
“The Treaties set out a ‘no bail-out’ clause, and the rules will be respected. This is crucial for guaranteeing the future of a monetary union among sovereign states with national budgets. Markets are deluding themselves if they think that the other member states will at a certain point dip their hands into their wallets to save Greece,” Stark told the Italian daily Il Sole.
“The country has not kept public accounts under control, nor worked to improve competitiveness. Greece is in a very difficult situation.”
The comments prompted an acid retort from Greece’s new-broom finance minister, George Papaconstantinou. “Frankly we don’t need that clarification. We don’t expect to be bailed out by anybody as, I think, it is perfectly clear we’re doing what needs to be done to bring the deficit down and control public debt.”
He said the government had agreed to even tougher measures than originally planned, aiming to slash the budget deficit from 12.7pc of GDP to 3pc by 2012 – a year ahead of schedule. “We are sending a message of determination and frontloading the adjustment,” he said.
The belt-tightening pledge came as a surveillance team from the European Commission and the ECB arrived in Athens. They are pressing for a rise in VAT and a multi-year freeze on public wages, a prescription for outright deflation or an “internal devaluation” within EMU as it is known to economists.
The ruling Hellenic Socialists (PASOK) party has so far balked at rises in VAT or fuel duty, arguing that such measures hurt the poor and are not “citizen-centric”. PASOK made wildly unrealistic pledges to secure election last autumn and is now in the uncomfortable position of having to tear up its manifesto. This is potentially dangerous in a Left-leaning political culture where people have yet to accept the need for harsh medicine. Mere hints of austerity over the past two years have been enough to set off street riots, while Communist trade unions are already threatening to strike.
The warnings from the ECB follow a string of comments from German politicians over recent weeks suggesting that Berlin will walk away from Greece if push comes to shove. The markets have always assumed that Germany will roll over in the end, if only in order to safeguard its half-century investment in the European Project and the post-war order.
Finance minister Wolfgang Schäuble said Greece will have to find its own “hard way” out of the crisis, distancing himself from a loose pledge given by his predecessor during the Irish crisis last February that the EU will ultimately step into help eurozone laggards. Volker Wissing, chair of the finance committee in the Bundestag, said it should be made explicit that “Germany will not take on the burden of Greek debts”.
These debts are large. The Greek central bank said gross debt to foreign creditors has reached €403bn (£362bn), or 168pc of GDP. The treasury will have to raise €56bn from the bond markets this year, heavily concentrated in the second quarter. The peak danger moment for the Greek debt office is from May to June.
David Owen, Europe economist at Jefferies, said Greece was “too big to fail” whatever they may say in Germany. “They cannot let Greece go because it would set off a euro crisis and cause markets to focus the debt dynamics of the next countries in line, Portugal and Spain.”
There is a view in certain circles of Germany’s Free Democrats and Bavaria’s Social Christians, as well as pockets of the ECB itself, that a refusal to rescue Greece would be a salutary lesson to others that breach the rules. Greece’s ejection from EMU might (in their view) strengthen the eurozone. The question is whether such people will determine the outcome.
“At the end of the day, this is going to be a political decision by Chancellor Angela Merkel and President Nicolas Sarkozy,” said Hans Redeker, currency chief at BNP Paribas. “The ECB is talking as if it were the old Bundesbank: in fact it is in a weaker position. Europe’s leaders are not going to abandon Greece.”
“What this crisis has shown is that EMU cannot function without a central fiscal authority. They will have to sort this out,” he added.
Mr Redeker said Greece might be able to turn itself round if the eurozone recovery is strong enough to lift all boats, but the 2.2pc decline in eurozone industrial orders in October is not encouraging. “We fear, the crisis will escalate in Greece and Spain.