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Eurozone: Greece Back in the Spotlight After Most EU Countries Agree to New Fiscal Pact

Posted on the 31 January 2012 by Periscope
Eurozone: Greece back in the spotlight after most EU countries agree to new fiscal pact

Prime Minister David Cameron at the World Economic Forum in Davos last week. Photo credit: World Economic Forum, Moritz Hager

Britain again played the conscientious objector to an European Union measure aimed at keeping member nations from breaching budget deficit limits, voting against the pact during a summit meeting in Brussels on Monday.

“I don’t think this treaty on its own will sort the eurozone’s problems,” said Prime Minister David Cameron, after voting against the measure, which would have member nations agree to put balanced budget legislation into their national law. Under the new treaty, annual structural deficits will be capped at 0.5 percent of GDP, and any breach of that would trigger a quasi-automatic penalty of 0.1 percent GDP, with the fine being added to the EU bailout fund, the European Stability Mechanism. The new treaty will come into effect once it has been passed by 12 of the member nations’ parliaments. The only other nation to decline was the Czech Republic.

The half-day summit in Brussels was intended to come up with a strategy to revive growth in European nations, but disagreement over the new treaty, as well as over the “limits of austerity”, as The Telegraph put it, and whether an EU commissioner should be placed in Greece to monitor its budget decisions overshadowed the official discussion.

But with the treaty now agreed and due to be signed in March, markets, economists and commentators are again turning to the on-going problem of Greece; already, European shares are rising on the hopes of achieving a deal with the indebted nation by the end of the week. So is there hope?

“What we got yesterday we got more bickering at the sideline, agreement on a largely irrelevant treaty while the issue of the size of the ESM/EFSF was left till March. They could have used the opportunity to boost the size of the rescue fund now building on the more positive market sentiment of late and in the process increased the chance of getting additional support from the IMF,” complained analyst Elisabeth Asfeth at Investec, according to The Guardian. “I guess it could be described as a consistent approach to the crisis; a German focus on austerity and no agreement on anything else.”

Will the new “fiscal compact” help? German Chancellor Angela Merkel believes that the new “fiscal compact” will make for a more perfect monetary union, but critics, Cameron included, claim that it’s just a distraction from the real problems that will “condemn Europe to eternal austerity and stagnation”. “Most likely, it will do neither,” judged Marcus Walker at The Wall Street Journal. “The proposed treaty doesn’t overcome doubts about the euro zone’s long-term viability and membership, and its constraints on government budgets aren’t as tough as they appear at first glance.”

How about a little humility, Mr. Cameron? Philip Stephens, writing at the Financial Times, complained that Cameron’s “bombastic” performance and attempts to “lecture” German Chancellor Angela Merkel on how to run her economy were unwarranted. “A smidgen of self-awareness might have suggested otherwise,” he suggested: “Mr Cameron presides over a budget deficit to rival that of Greece, a fast-rising debt burden and an inflation rate double the European average. Living standards are falling, growth has stalled and unemployment is rising. There is no one old enough in Whitehall to recall the last time Britain ran a current account surplus.” Maybe instead of telling Germany to “to work less, to borrow more, and to produce shoddy cars and machine tools”, Cameron et al could instead learn something from Germany’s economic management?

Ed Miliband, Labour leader, complained that Cameron “sold Britain down the river”, effectively isolating the island nation, in voting against the fiscal tightening measure.

The Greeks need to go – and here’s how. The Times (£), in a leading editorial, again pounced on what they see as the main trouble for the euro: Greece. Greece needs to get out of the monetary union as much as the unions needs it to go, the paper claimed. “Greece will default on its debts. But there will be no escape for Greece from slump while it remains in the euro.” The paper proposed, as its entry to the Wolfson Prize for designing a strategy by which countries could leave the euro (without bring about Armageddon, presumably), “the reintroduction of a new drachma by Greece be part of an arrangement known as a currency board”, “where the value of a currency is pegged to the value of another”. The new drachma would be pegged, however, not just to the euro, which would merely replicate its problems, but to the dollar as well.  “This arrangement is no cure-all. The responsibility of Greeks to restore sense to their public finances cannot be evaded. Other countries will still need to stand behind them as they do it. But Greek departure from the euro is not only necessary. It can be done, and without a run on the banks.”

International debt inspectors have delayed a meeting with Greece’s labor minister to discuss reducing employment costs, a major “sticking point” in negotiations between Greece is its eurozone creditors, the Associated Press reported. Eurozone ministers want to see Greece engage in serious labor reform, before agreeing to the second bailout loan worth €130 billion, but the country continues to reject suggestions to cut minimum wage and private sector pay.

If Greece stays, it needs a minder. “I’m sorry, but I cannot agree with the general sense of outrage sparked by calls for an EU bureaucrat – or German gauleiter, as depicted in some quarters – to take control of the Greek economy,” protested Jeremy Warner at The Telegraph. “Greece lied its way into the single currency, and it has repeatedly failed to keep its promises since, even after agreeing the conditionality of IMF and Eurozone loans. If it wants to stay in the club, which bizarrely in my opinion, it still appears to, then some way of forcing it to obey the rules must be found. You don’t keep lending to a perpetually delinquent creditor.”

More on the economy

  • RBS boss Hester turns down massive bonus
  • Eurozone debt crisis continues to deepen
  • Will David Cameron really legislate on fat cat pay?
  • Is the UK economy doomed?

 


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