Tuesday, November 1, 2011

Greece and Europe: hardball over default

Europe's creditor and debtor countries are playing hardball over how to handle the Greek crisis. And it matters, because Greece is only the beginning. What is decided here will set precedents. A couple of points are worth underlining from the events of the past week.

First, the EU has made some progress, but it is mostly in agreeing on haircuts on Greek debt. This was something that had to happen, and it is positive, but it only applies to banks, and those banks are being paid with taxpayer money to compensate for the loss, at least in part. If pension funds, hedge funds, or individuals hold Greek bonds, they still can claim 100%. A real solution needs to be more radical.

Second, the increase in the EFSF, the bailout fund, is modest and inadequate unless it is leveraged, and it doesn't look like anyone is biting yet. Neither China nor Brazil seem keen on pouring that kind of money into Europe.

Third, there have been wide-ranging discussions about establishing a European Minister of Finance. It might become a reality, but it is unlikely that this individual would have any real power. The EU has very little tax revenue, nor will it have much. It is only intended to put the screws to Greece. But you don't really need a new Commissioner for that.

Fourth,the very limited deal that has been struck now looks to unravel. The summit itself was delayed, revolved around France and Germany, and now seems to be put in question by a Greek referendum on the deal that is being offered. We will have to wait and see whether Greeks accept the terms of the deal, which would still impose hardship for a long time on the country, but just about be payable, or whether they say Oxi (no).

Greece really does have a choice. Should the people say Oxi, it would be best for Europe to do the dignified thing and deal with the consequences as best they can, rather than doing what they usually do, which is browbeat the country until it votes as it 'was supposed to'.

No comments:

Post a Comment