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Monday May 3, 2010 - 21:05:10 GMT
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Let's make a European DealThe Greek financial rescue signed on the weekend is a multi-year package
totaling â‚¬110 billion. It is a necessity if Greece is to avoid default
on May 19th. As Prime Minister Papandreou said with Mediterranean brio,
â€śWhat is at stake is the survival of the nationâ€ť. Surely not. Many
nations have survived defaults, Russia and Argentina to name only the
most recent. Survival, in Mr. Papandreouâ€™s terms, means within the
European Monetary Union and the European Union. Those memberships might
not survive a Greek default.
The Greeks had been defiant as recently as one month ago when Prime
Minister Papandreou told his European fellows leaders that if help were
not forthcoming then he would go to the IMF for a loan. Mr. Papandreou
was counting on European pride; he neglected to consider German
practicality. Angel Merkel responded, 'we agree let us go to the IMF'.
We can assume the Greek rescue becomes fact, if not this week then some
moment before the May 19th bond redemption. Let us further assume the
best political case. The Greek people acquiesce and support the
government. The protests in Parliament Square in Athens die out. The
anarchists return to Eksarxia. No other revisions are made to government
deficits. The world economy continues on its moderate recovery and does
not fall back into recession. In those favorable circumstances, what
can we expect will be the long-term effects of the Greek debt rescue?
Austerity plans will follow in Portugal, Spain and perhaps Italy.
Frightened by the terms that the IMF will impose on Greece, governments
in those countries will not want to risk credit market displeasure.
There will be protests from unions, civil servants and social welfare
rentiers, but the logic of the private debt markets will impress all but
the most recalcitrant of the population. It is far better to be in
control of your finances than to cede power to the IMF. The logic of the
debt market is simple. Governments cannot compel private individuals to
lend money the way they can compel tax obedience on their own citizens.
Austerity will keep EMU economic growth below that of its trading
partners and below its own long term potential. The IMF predicts that
the Euro zone will grow 1.0% in 2010 and 1.5% in 2011. That is less than
the projected growth for the United States, 3.1% in 2010 and 2.6% in
2011, the United Kingdom 1.3% and 2.5% and even Japan 1.9% and 2.0%.
Individual EMU countries will perform better. Germany and other high
value exporters will be relatively prosperous with a recovering world
economy, but the EMU as a whole will have an extremely weak recovery.
The ECB will keep rates low longer than the United States. The central
bank will have no choice. European governments and the IMF need not only
the approval of their legislatures but also the acceptance of their
people. With inflation at 0.9% in March and 1.4% yearly and core CPI at
1.0% in March, low rates are a popular concession that the ECB can
Anemic growth in the EMU and the inability of the ECB to raise interest
rates will keep the euro on the defensive as the Fed slowly but with the
security of moderate GDP growth starts on the long road back to normal
The political cost of this three-month wrangle and IMF rescue will be to
halt the unification of the EU in its tracks. The Lisbon treaty was
already widely unpopular in Europe but at least the accretion of central
power to the EU commission could be held up as some kind of logical
extension, comparable to the federal union of the US.
In its first real test of operational as opposed to theoretical unity,
the EMU and the EU were forced to turn to the IMF for help. The nations
of the European Union turn out to be nations first and EMU members
second. The EU did not turn to the IMF for liquidity; there was plenty
of money available within the EU to rescue Greece. It was for political
expediency and cover that the IMF was needed. The IMF was able to force
terms on Greece at arms length from the EMU. The fiction was as useful
in Germany, where it kept the taxpayers from bearing the entire
financial burden, as it was in Greece, where German imposed terms have
unfortunate historical connotations.
The Greek debacle will also have permanent ramifications in the bloc of
countries that are EU members but not participants in the single
currency. The Union has 27 members, the EMU only 16. All EU members are
supposed to give up their individual currencies and join the euro as
soon as they can meet the convergence criteria of the Maastricht Treaty
and satisfy the 3% and 60% deficit and debt limits.
For relatively advanced countries like Poland, the Czech Republic and
the Baltic trio of Estonia, Latvia and Lithuania, whose economies can
compete with Germany and France, as well as for less developed nations
as Bulgaria, Romania and Hungary, whose economies are not ready to
compete, the advantage of a separate currency has been demonstrated
without reserve. After this crisis they will be reluctant to join the
euro. Countries in different stages of development and with different
cultures cannot necessarily compete in the world market simply because
the political logic of a formerly war torn continent says they must.
By the time the full costs of the prolonged Greek crisis are realized
the crisis will have affected almost every aspect of European political
and economic life.
It has permanently damaged the ability of the Europeans to accomplish
the economic and political agenda that was set forth by the immediate
post World War Two generation. It will inhibit European GDP growth for
several years, at least as long as the austerity budgeting lasts and
perhaps longer. It has undermined the credibility of the ECB and its
ability to counter inflation. Finally, it has shown the world that the
EU cannot sustain any claim to federal status. Brussels is only a
bureaucracy. When politics become difficult the Europeans act as nations
with interests and not as generous neighbors.
The US Dollar cannot but benefit. Regardless of the dollar's comparative
economic performance in the future, the US currency will retain its
preeminent status in the world economy. Its only competitor for reserve
status, the euro, is the currency of the EMU, an economic but not yet a
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