piigsty

For the eurozone, July 21^st 2011 was a day that will live in infamy…

Well not really. European leaders agreed a revised second bailout package for Greece on top of the €110bn from the troika (EU-ECB-IMF) the Greeks got in May 2010. But wait, theres more! Heres a summary:

• Greece gets another €110bn (for a running total of €220+) from the troika
• The role of the European Financial (Rescue) Stability Fund or EFSF (a huge €440bn pot of euros guaranteed by the remaining AAA credit rated eurozone nations) will be expanded into a quasi-European Monetary Fund with PIIGS debt/bond buying power, stronger regulatory control of the banking sector and conditionality on aid, giving Germany and France a bigger say in EZ economies
• Allow ‘Bond Exchange/Swap’ – an orderly exchange of current Greek bonds (due to be paid back by an insolvent Greek government) for future bonds, giving Athens more time to pay its debts – from 7.5 years now to 15-30 years (up to 40 in some cases). If Greece goes bust, many EU commercial banks will follow so theres a BIG incentive for them to help out
• EU-IMF package interest rate cuts for Portugal, Ireland and Greece (to around 3.5% from 5-5.8%)
• A mini ‘Marshall Plan’ to kick start some growth in the Greek economy
• Bondholders of Greek debt must accept a 21% ‘haircut’ in the value of their bonds (Greek bondholders =  mainly Northern European banks i.e. German, Dutch, Belgian and French banks. They are being made share the burden)

Of course, now we have the economics – we’re soon to be knee deep in politics (this is the EU after all). The EFSF cannot use these new powers until Late September or more likely early October as this change requires parliamentary approval across the EU-27

The US debt debate (debacle?) showed that even stateside, politicians and commentators have difficulty separating too seemingly similiar issues. Lets clear up the confusion. In the PIIGS and beyond, we have two similar yet unique problems.

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“Greece, like other countries, has to experience that if one doesn’t stick to fundamental rules of stability one has to pay a high price, which Greece can’t be spared from.”

– German Finance Minister Wolfgang Schaeuble

The recent crisis has revealed in very agonising fashion the endemic failings of EMU from a policy ‘one size fits all’ perspective. The usage of EMU by peripheral EU members to ‘leapfrog’ on the back of credible, creditworthy financially strong nations has led directly to the restructuring-default impasse of 2011. The consistent view of the financial markets is not default per se, but the risk of contagion from and between the so-called PIIGS and its effect on the larger more stable nations and, inevitability, on the European lender of last resort and anchor of the euro, Germany.  Aside from the rhetoric, fiscally speaking, just as a budget crisis in New Jersey or California cannot pull apart the US dollar, one in the PIIGS cannot, by itself, bring down the euro.

The real problem is that if the situation among the PIIGS is not uniformly the consequence of a sustained period of spending binges like some assert, than how can EU-European Commission-IMF (troika) force common austerity plans upon structurally and fundamentally different economies? For example, previous economic mismanagement and governmental profligacy is far more prevalent in the Greek case than the Irish case, which is predominately a fiscal crisis caused by a severe banking crisis. Does that mean preferential treatment is likely for Ireland? If not, why not?

The problem now is how, without the correction mechanism of devaluation to reinstate a competitive edge for exports do Portugal, Ireland and Greece return to economic health especially in the midst of painful deflationary austerity plans and, in the Greek case, future massive privatisation schemes and public sector wage slashing. As Krugman asserts, we are in a quite bizarre situation, akin to the Hoover Administration in 1930s Great Depression America, where authorities sought to deflate a balloon economy which had already unceremoniously burst. This so-called ‘inverse Keynesian compact’ took the opposing view of Keynesian stimulus spending (to jump start economic engines by pumping in cash, like ‘oil’, to get the economic ‘engines’ working again) by aiming to tackle crises by doing all you can fiscally to restore confidence.  In a panic, all you can really do with any assurance is combat collapsing recessionary tax revenues with deep cuts to public spending to meet avoid drowning in red ink. Of course, the question then arises – if the Hoover method prolonged the Great Depression, why are the troika insisting on this in the Irish, Greek and Portuguese cases?

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