Greek Default and the Euro Zone Crisis

Standard and Poors downgraded Greece today to Selective Default status. The International Swaps and Derivatives Association is now debating whether this means that credit default swaps are due to be paid as a result. It will decide by the 29th. If it argues that they are due to be paid, then a great many contracts will have to paid out, some banks won't be able to fulfil their obligations.

This is an excellent time for national governments in the EU to consider whether the core business of retail banking ought to be connected to the world of financial derivatives, investment banking and international finance. It still is, and perhaps should not be.

Europe's autocratic politics of debt

Two things have come across the news this week, neither of which bodes well for the EU.

First, the EU Commission and Council, following up on agreements made with the Troika, insisted on written statements by both major political parties in Greece that they would be denied a bailout unless they both declared in writing that they would accept the ultimatum that the Troika had imposed on the current government. Elections are coming up soon, and the EU's creditor states are intent on ensuring that choice is off the table. Of course, Greece could chose to fold and walk away from both the euro and the aid, but neither Commission nor Council are saying that. (Though one politician is now talking openly about Greek exit.)That should again give everyone pause about what the EU stands for.

In the absence of agreement, a Council meeting scheduled for tomorrow has been cancelled.

Second, the Commission is busy preparing to punish Spain, which has been ahead of the curve and the Commission in dealing with the crisis, by charging the government money for not moving any further. I don't know what the responsibles in Brussels are thinking, but whipping the most compliant is not going to further their cause. If anything, it reeks of desperation, to show that the excessive deficit procedure is relevant, somewhere, somehow. That's no way to run the EU.

Once upon a time, the EU stood for democracy. It brought both of these countries into the Union to bolster democratic movements and to prevent a return to dictatorship. And now, it views democracy as the greatest threat to the Union.

Ironic, isn't it?

This is a bad move on the part of the EU

Who Pays Attention to ECOFIN?

Southern Europe, that's who. Log onto Twitter, search ECOFIN (the EU's Council of Economics and Finance Ministers, responsible for decisions on the euro zone), and you'll get mostly posts from southern Europe. Type in a country name, like Portugal or Greece, and the sources become more varied.

It says something about how the power relationships are currently felt in euro zone politics.

What impact they have remains to be seen. ECOFIN meets tomorrow to discuss public policy progress and debt restructuring for Greece. One demand has already been made clear: aid is conditional on all main political parties accepting it.

A Europe of the States or a European Union?

It's been a while since I last wrote. Things got busy.

In the meantime, Europe's leaders have announced a fiscal pact that will institutionalise EU control of member state finances, which will mean the most for countries that lose control and need outside aid to stay in the euro zone. This isn't a fiscal union, involving real transfers, and it reinforces the responsibility of the member states of the euro zone to get their own houses in order. It's more a Europe of the Member States rather than a European Union per se. If that is what they really want, then fine, but beyond the question of who 'they' are, and I think it means creditor states, supported grudgingly by debtor states for fear of hurting at the hands of financial markets even more than they do today, but it means that periodic crises are likely to happen from time to time in the euro zone.

It's not the only economic policy area related to the financial crisis in which the EU has effectively pushed the member states to the fore and demanded more of them--institutionally, financially, and in terms of pre-determined policy. I'm currently attending a workshop on banking in the EU and the impacts of the financial crisis that the University of Denver and the University of Colorado at Boulder are so kind to organise and support. I'm learning a lot from my esteemed colleagues. What interests me is how national financial stability measures remain in Europe, despite claims by some to the contrary. I'll follow up on that in a subsequent post.

What does this mean? Europe remains fragile and vulnerable. Strength requires more.