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Greek bailout,and soon?

Jan 28th 2010, 10:01
IN Brussels policy circles, the question asked about a bailout of Greece used to be: are European Union governments willing to do this? Now, I can report, the question among top EU officials has changed to: how do we do this?

Twice in the past 48 hours I have heard very senior figures—both speaking on deep background—ponder the political mechanics of how large sums in external aid could be delivered to Greece before it defaults on its debts: a crisis that would have nasty knock-on effects for the 16 countries that share the single currency.

One figure said yesterday that heads of government could not wait "forever" to take decision. That means a decision in the next few months, at most. Greece's draft plans for reducing its deficit from around 13% to 3% in three years did not seem credible, said this source. Thus a crisis loomed. "We need to help them," he said. This means "external aid" of some sort, in exchange for strict conditions. As a top priority, conditions would have to include a complete change in the way that economic statistics are collected in Greece, ending years of political manipulation and book-cooking so that data from Greece can be relied upon (indeed, the distrust is so deep that nobody would be astonished if even the latest Greek deficit number of almost 13% underestimates the full horror of the situation).

Both senior figures confirmed that it was politically unthinkable for the International Monetary Fund to intervene in a member of the euro zone. But Greece would have to agree to spending cuts every bit as painful as those that would be imposed by the IMF, it was said.

A third question (can a euro zone country legally be bailed out?) has been answered long ago. It is commonly said that the Maastricht Treaty rules establishing the euro include a no bailout clause. But as Tony Barber noted in his Financial Times blog this week, there are EU rules that allow for financial aid to countries in trouble due to exceptional crises. More technically still, the Maastricht rules in fact forbid other countries from assuming liability for the debts and commitments of fellow-members. That is not quite the same thing as a blanket ban on aid. In any case, the then German finance minister, Peer Steinbrück, let the cat out of the bag last February when he said: "The euro-region treaties do not foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."

For several months, as the problems in Greece and other members of the euro zone deepened, there has been debate about whether other governments were willing to help. There was real anger among European officials and political leaders when the centre-left government elected last year turned round and informed Brussels that Greece's predicted deficit for 2009 would be 12.7% (or more than double what had been previously reported). Though in truth some of the shock was feigned: everyone had long suspected the deficit numbers being reported by the last centre-right government stank.

Last December's EU leaders' summit now looks like a clear turning point. At a private dinner with other leaders, George Papandreou, the Greek prime minister, bared his country's soul. He described rampant corruption within the state, notably in the field of public procurement, and said his country had far too many layers of local government, some of which would need to be abolished. That candour seemed to shift elite opinion in his favour. His finance minister, George Papaconstantinou, has also been touring European capitals spreading the message that this time, Greece is serious. A smooth operator with a doctorate from the London School of Economics, Mr Papaconstantinou's road-show has been getting positive reviews.

What this does not mean is that other EU leaders believe that the current plan drafted by the Greek government is going to work, in terms of deficit reduction.

So now we are into how to help Greece. The technical mechanics of getting the money to Greece seem not to cause too much worry. I have heard senior figures talk about advancing Greece money from EU structural funds they were due to receive in the next few years, or about loans from government-owned savings institutions, such as the various Caisses des Dépôts and National Savings funds in the EU. There are "no taboos" on how to find the money, I was told, the goal is only to avoid actions that damage the credibility of the euro.

This brings me back to an interesting detail about the IMF. It is often said that the IMF cannot intervene within the euro zone because it would be too humiliating, politically, for the EU to admit it could not look after one of its core members. That is clearly a view shared by senior officials. However, one source offered a further reason why the IMF is not welcome that I had not heard before. The fund's experts typically offer countries in trouble a mixture of fiscal and monetary advice, he explained: ie, they tell countries to cut public spending and raise taxes, but also to alter interest rates and take steps to stabilise their currency. If the IMF told Greece to cut public sector salaries, say, that would not shock the rest of the EU, he said. But what if the IMF demands that Greece tighten or loosen its monetary policy? Greece shares its monetary policy with the other 15 members of the euro zone: would the ECB be expected to change its monetary policies? And what would Germany have to say about that?

How soon could we see action? Well, European heads of government are now busy talking to each other about this, or rather their top officials are. Leaders themselves will meet for an informal economic strategy summit in Brussels on February 11th.

The word going out is, don't panic. Greece only accounts for between two and three percent of Union GDP: its woes are astonishing (and largely self-inflicted, despite the conspiracy theories swirling within Greece), but they are "affordable", senior figures say. I wonder if people are being too calm. It is one thing to talk about external aid in exchange for tough conditions. But what if those conditions are politically impossible to meet? I am not talking about reliable statistics, it must be possible to parachute in crack EU auditors to watch for political manipulation. But as I wrote in an earlier blog posting, if the EU finds itself asking for IMF-style budget cuts in Greece, the political consequences will be grim. If I were the European Commission delegation office in Athens, I would be buying some fire extinguishers.

http://www.economist.com/blogs/charlemagne/2010/01/greek_bailout_within_months