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Tuesday February 2, 2010 - 17:14:58 GMT
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Greece and Europe
â€śWe are cooperating with those who have more serious problemsâ€ť, said
Joaquin Almunia European Union Economic and Monetary Affairs
Commissioner. â€śWe are all in the same boatâ€ť. Truer words were never
Sovereign debt is not a Greek problem, (though it is the Greek
problem); it is not a European Monetary Union (EMU) problem. The
explosion of deficit spending and debt is a European Union problem.
Membership in the European Union, what used to be called the Common
Market, is supposed to include adopting the united currency, the euro.
New EU members, like Poland and Hungary, are expected to meet the
economic convergence criteria for euro qualification set out in the
Maastricht Treaty within a few years of joining the EU. Their
governments are instructed to discipline their budgets and stabilize
their finances under the strict 3% and 60% deficit and debt to GDP
limits of the Stability and Growth Pact.
â€śIt is quite clear that economic policies are not just a matter of
national concern but European concernâ€ť, stated Jose Manuel Barroso,
European Commission President. The European Commission, headquartered
in Brussels, acts as the executive to the 27 nations of the European
Union. The smaller 16 member set that uses the euro forms the EMU.
The Greek deficit is a threat not only to the credibility of the EMU,
the euro and the continued existence of the Stability and Growth Pact
of the Maastricht Treaty. Greece represents the failure of the
convergence criteria for accession to the euro. It is a threat to the
adoption of the euro by the remaining eleven non EMU members of the
After this deficit experience will the central European Union countries
of the EMU led by Germany and France ever accept the new members into
the euro without the qualifications of the Pact? But how will the
governments of Hungary, Romania Bulgaria, Poland and the others promote
the economic hardships necessary to meet the Pact criteria to their
voters when current EMU members have transgressed the limits at will
and without penalty? Why adopt the euro at all, particularly when an
independent currency provides monetary and interest rate flexibility
without having to give up the trade and economic benefits of the
Union's common market?
Every EMU member is expected to breech the 3% deficit limit in 2010.
Under the extraordinary conditions of the financial crisis and the
recession that one year breech in itself would probably not sink the
Stability Pact. Given time the aspiring euro countries would be willing
to submit themselves to some fiscal and monetary criteria, perhaps
weaker and more flexible, in order to join the euro. The European
Commission could if necessary apply strong pressure through the
subsidies, and trade, labor and other concessions that have been
granted to the non-EMU nations.
But if in 2013 Spain, Italy, Ireland and Greece, for example, are still
beyond the 3% limit the willingness and ability of governments to
undertake the discipline needed to meet the convergence criteria and
the Stability Pact are likely to be minimal. The euro promise is likely
to seem far-fetched and fanciful to those Eastern European electorates.
There is no easy escape for the Europeans. If the markets force Greek
bond rates to a point where they begin to damage other EMU sovereign
debt then the entire government funded continental recovery stands at
risk. But if the rescue of Greece is too swift or lenient the aspiring
euro countries will hardly be encouraged to respect the Stability Pact
when their turn to join the euro arrives.
European corporate bond rates have already responded to the
uncertainty and doubt engendered by Greece. Corporate bond buyers have
begun withholding purchases. They know that companies must clear their
bond sales and a few days of waiting may provide the purchasers with
better rates on bonds whose creditworthiness is essentially unchanged
from last week.
The premium for Greek government debt over German Bunds, the strongest
European debt and used as a standard for risk, narrowed to 3.73% on
Friday after having been at a record 4.05% on Thursday.
Despite recent denials by European Union officials and earlier German
and French government disavowals that they were contemplating a Greek
rescue, the Athens stock market finished Friday trading 3.2% higher.
European officials at all levels, in national chanceries, in the EMU
and the European Commission have been discussing in private budgetary
support for the Athens government. When a plan is announced officials
will go out of their way to deny that it is a bailout of Greece. They
will note its strict criteria and the Greek promises to reform and the
government's determination to bring its underground economy into the
light. They will highlight the unprecedented nature of the financial
crisis and its effect on national economies. All of these things may be
true; the promises may even come true. But after this very public
debacle how will any prospective euro member take the Stability and
Growth Pact seriously?
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