Greek Signal by Germany (and France) will help Eurozone, not just Athens
The major nations of the eurozone have agreed on a $25 billion bail-out plan for Greece, a crucial first step in practical help and solidarity from the EU to help one of its weakest member-states survive its debt crisis.
The likely deal is expected to take the form of loan guarantees – perhaps as much as 25 billion euros – that would enable Greece to borrow money more cheaply and gain breathing space for its drastic domestic economic reforms to take effect. Proposals include direct loans from individual governments and a system of loan guarantees, all tied to strict Greek observance of fiscal discipline and implementation of structural economic reforms.Technically, the plan under discussion in Brussels by eurozone finance ministers on March 15 does not include any explicit offer of financial aide to Athens. An actual bail out is not needed at this point, French Finance Minister Christine Lagarde, said this weekend. But intervention plans have been made so that it could happen almost instantly if Greece defaulted on its debt, she added.Already, the initiative now expected from the major EU governments, notably including Germany, is being seen as a step in the direction of some “economic governance” in the eurozone, including both instruments to help a troubled government and also measures to punish wayward euro-currency governments that let their sovereign debt levels rise to become so high they become a systemic threat to the eurozone.
The rescue plan, as it takes shape, seems to involve hopes that the mere existence of a plan, backed by Greece's own efforts to curb its profligate government spending, will suffice to restore Athens' credibility with markets -- without eurozone member states having to provide any actual financial bail-out. Germany, the biggest EU economy, is fiercely reluctant to spend money helping out a southern European country that has cheated on the rules for being part of the eurozone. But Berlin and Paris finally seem to have agreed to put up financial guarantees (and cash if necessary) to preserve the integrity and reputation of the euro, the EU’s boldest achievement so far.
The timing can be explained by three factors. The time it took for other EU states to measure the Greek predicament – and its implications for the euro. The time it took for the Greek government to show everyone that it was determined to make Greek citizens pay with major sacrifices before fellow EU countries, notably Germany, decided to ante up funds to save the Greeks’ from bankruptcy. The Greek prime minister has just completed a swing through Washington and EU capitals to convince his fellow leaders of his (Socialist) government’s determination to push through tough public service and entitlement reforms despite stiff public opposition in the streets. And the time to make international speculators realize that their hopes – of a quick killing – have started to look premature.
Such a deal has long been expected, but rumors in Brussels that it has materialized had the effect of raising the value of the euro in world markets.
The help, if it materializes, will make it easier to Athens to borrow more money in international markets at reasonable rates. It will also relieve pressure on all the most indebted eurozone countries – the PIIGS, Portugal, Ireland, Italy, Greece and Spain – to stave off attacks on their national borrowing by hedge funds and other players ready to bet against them as countries liable to default on their national debts.
The message from Brussels is that the big successful economies in the eurozone – notably Germany and France – will not let that happen. So hedge funds that are borrowing money to bet against Greece (and the other PIIGS) face the prospect of having to pay back their own loans on very expensive terms of themselves – a prospect likely to inhibit more speculation.
As part of the deal being forged in Brussels, Germany and France are demanding that the eurozone rewrite its rule book about economic convergence, including sanctions against governments (such as Greece’s) that deceive their EU partners about their real financial situation.
The emergence of changes of this sort, including effective measures of discipline against offending eurozone countries, the new fiscal discipline and beginning of collective economic governance among the eurozone countries, could an important step forward to the EU’s global clout. Such progress toward economic coherence and credibility could amount to progress on a par with the Lisbon treaty – and, for the long run, a silver lining to the current economic hardship being inflicted on the EU economies.