16 February 2012

Stewart Fleming: The ruin of Greece?

Writing for European Voice, Fleming says that the bailout of Greece still hangs in the balance. But eurozone finance ministers are right to believe that they have the whip hand in the negotiations.

Interestingly, Germany, whose hard line on the bailout is constantly under attack in the eurosceptic English-speaking press, seems to have reluctantly accepted the need for quantitative easing, ECB-style. There have been no more German resignations from the ECB's executive board.

This suggests that the progress that has been made on strengthening eurozone economic governance (even with the “wriggle room” that one top EU official says France has woven into the accord) together with the conditions set on another Greek bail-out, are sufficient to convince Chancellor Angela Merkel that she has a deal that can be sold to the Bundestag and the electorate.

Staring down the barrel of a gun, Greeks have no real choice. This week's stalemate is mere posturing. If Greece does not receive the €130 billion bailout, it will be forced to default next month when €14.5 billion of government debt falls due. Pensions and state salaries would no longer be paid, and obstinate Greek politicians would be unable to view their future career prospects with any confidence as the Greek economy imploded.

There is also now, it seems, an understanding with China that, assuming Europe deals firmly with hard cases such as Greece, China will contribute to strengthening the financial resources of the IMF. That feeds an expectation that others will follow suit, strengthening global defences against a contagious Greek default. Greece is becoming a sideshow.

Financial markets are also less tense, reassured not just by these developments but also by signs that the reform efforts of Mario Monti's new government in Italy can be taken seriously and by evidence, that, once again, the US economy is defying the doubters and growing more strongly than previously expected.

There should be no illusions. Greece's economic crisis continues. Europe's banking system and its economy are still in intensive care. Pumping even three-year money into banks does not solve their fundamental problems, nor does it guarantee that liquidity will metamorphose smoothly into loans to businesses that would sustain a healthy economic recovery. However, looking at developments over the past six weeks, it is plain that the EU-IMF-ECB troika is much better placed than it was in November to face down intransigent Greek negotiators.

A harsh message has been sent to Greece and other troubled sovereign debtors: EU/IMF bailouts are no longer a soft option. Athens will ignore it at its, not Europe's, peril.

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