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Friday, November 09, 2012

Economic realities push Europe closer to a Greek decision

We have a piece in City AM today, which look's  at the impact of this week's crucial votes in Greece, see below for the piece in full:
One down, one to go. The Greek government has got through one crucial vote this week and looks likely to ride out the budget vote on Sunday. Although markets and eurozone leaders will breathe a sigh of relief as Greece makes it through another crucial week in its economic crisis, the government has not been left unscathed.

Pushing through the latest, and supposedly last, package of stringent economic reforms and budget cuts has exposed deep cracks within the governing coalition, as the Democratic Left and Pasok parties put up a fight to slow the process of public sector cuts led by Prime Minister Antonis Samaras’ New Democracy party. It took two days to push the package through parliament, while a reported 100,000 Greeks took to the streets in Athens to protest against austerity, once more leading to violent clashes with police.

However, a bigger problem for the government is the flurry of economic figures which have again exposed deeper flaws in the Greek economy, propelling talk of a Greek exit from the eurozone back into the headlines. The new budget projects Greek debt peaking at 192% of GDP, rather than the 167% estimated previously, but even this revision seems to be built on optimistic assumptions. Unemployment, investment and exports are all projected to stabilise, despite most indicators predicting the opposite. In fact it is now abundantly clear that Greece will need an extension to its current bailout.

The questions to ask then are: how much would such an extension cost and how could it be funded? We estimate that slowing the Greek fiscal consolidation programme by two years could cost an extra €28.5bn (rising to €39bn if Greece fails to borrow from the markets – something which looks increasingly likely). The main options being proposed include: reducing the interest rates which Greece pays on its current bailout loans (which could raise around €3bn over two years) or putting a hold on interest payments for a few years (which could raise €10bn+, but would be much trickier legally). These options would likely be combined with some further austerity and increased short term debt issuance by Greece – both of which could actually increase Greek debt levels, not exactly what is needed. The kicker is that even this is unlikely to be enough.

The question of an extension then, drives home that a larger decision on Greece’s position in the eurozone is closing in on EU leaders. Even talk of using bailout loans to buy back Greek debt at a discount and then retire it, to provide extra funding, would require a big political decision on further loans to Greece. However the funding is found, it will likely involve breaking a taboo – either by the ECB (in terms of helping to fund states) or more likely by eurozone countries in allowing permanent transfers to a country whose future funding is far from assured.

The Greek government and the eurozone will make it through this week but this short-term success is likely to belie the massive decisions ahead.


Rik said...

EZs leaders have forgotton to build in a deferral mechanism in the rescue bodies. That is the problem they are facing now. Basically something were you could dump the bookkeeping losses of say an OSI for Greece, without making it directly a budget issue in most of the donor countries like a haircut now will likely do.
Now basically an IMF demanded OSI for as far as it is not possible to route it via things like lower interest will be a budget issue and there the theater will start.

Regarding the ECB it is not only a taboo it is also selfproclaimed by the ECB illegal. And as such the way to end up in all sorts of legal stuff with mainly angry Germans.
The whole strategy of the ECB legally at least (and for this part) is simply based on creating facts on the ground that can basically not be reversed when deemed illegal by a court. You simply jeopardise this set up.
Vis-a-vis the EZ countries the ECB tries to state that things are illegal when they are pulled further in. Stepping over this pulls them further in. But also makes them even more vulnerable than they already are.
Because of the whole line they are doing things or say they will do things that simply look not allowed by the EU-treaties.

Look forward when things go rely over the budget and cuts in other places are required. Very doubtful if the Euro will survive many of those.

Agincourt said...

This whole situation is RIDICULOUS! The solution is simple: GREXIT - ie Greece LEAVES the EURO! When? NOW! When should this have happened? MONTHS ago!

Rik said...

The problem the EZ has with Greece that although it was clear from the start of the crisis for anybody with an ounce of a financial brain that Greece most likley would leave the building , they still started with knitting Greece closer and closer to the rest in their statements.
If you say every day that if Greece falls the rest will be in trouble iso that Greece are a bunch of cheaters whose word is worth less than their bonds and the rest is credible (give or take a Berlusconi or Rajoy). And use the money waisted on Greece to build a defence for the rest.
You can drop them much easier. If you start shouting from the roof that after Greece the rest will follow (which was not a real big issue until Merkel started bringing it up for political reasons), you create your own problems.

Problem is they donot think far enough ahead. Like with the UK reneg. No one has mentioned that the UK leaving would be worse for the Euro than a Grexit and likely considerably. If you link heavily the fate of the Euro with the fate of the EU, that is what markets will pick up somewhere. Not small corrupt unsustainable Greece leaving but one of the nett paying Biggies. While at the other side new basketcases are invited. What you think that markets will make hereof? Not much good.

Rollo said...

If Greece remains in the Euro, it will never recover, however much money is thrown at the debt. All the dire effects predicted to occur if Greece leaves the Euro are already happening right now. Greece will never be an industrial competitor to the Ruhr valley. What they need to do is get out of the Euro, default on their debts, start again with a new currency they can live with.
The alternative is a full membership of the United States of Europe, where they will remain a poor and subsidised region; and no Greek wants that, however much Brussels strives for domination.

Average Englishman said...

This whole saga reminds me of Monty Python's 'Dead Parrot' sketch. For those of you not familiar with this tale, the plot involves a disgruntled customer returning a Norwegian Blue Parrot to a pet shop because on arriving home he finds that the parrot is dead and would have fallen off its perch if it had not been nailed on!

It is alleged that Greece only managed to join the Euro because the figures were fiddled by the Greeks and EU officials turned a blind eye; a dying if not a dead parrot surely?

I believe that many advisers to UK institutions have been saying for some time that the departure of Greece from the Euro zone is a foregone conclusion and that the only question is whether Portugal goes with them.

In the words of Michael Palin:- "lovely feathers the Norwegian Blue", (beaches in Greece.....).

In case I should be misunderstood, I take no pleasure in this situation. The Greek people deserve to be served much better than they have been by their politicians and that they continue to be by EU bureaucrats. However, it would seem that in the medium to long term they would be far 'better off out' and no amount of fudging will conceal this. Still, when viewed from Berlin, what does one dead parrot really matter?

Denis Cooper said...

Once again, it has long been obvious that the eurocrats will do whatever they possibly can, legal or illegal, ethical or unethical, to preserve the present eurozone intact.

That would still be true even if it was not Greece but tiny Malta that was in desperate straits: to allow any country which has once joined the euro to subsequently leave it would not only set a precedent, it would require changes to the EU treaties so that an exit mechanism became a permanent feature, and so a permanent threat to the ambition that all member states of the EU must eventually adopt its currency.

An ambition which was clearly expressed by Merkel in May 2010:


"Our goal must be that all EU member States join the euro one day”

without making an exception for either the UK or Denmark, the two EU member states which have treaty "opt-outs" and so are free from the legal obligation to ever join the euro.

Obviously the goal of getting the euro established as the single currency, the only currency for the whole of the EU, would be more difficult to achieve if the EU treaties provided a route for a country which had joined to later make an orderly withdrawal.

It seems to be slowly dawning on some Tory MPs that as the EU treaties stand the eurozone must, by law, expand beyond its present 17 members, and that the UK will be increasingly minoritised and eventually will find itself in an untenable position within the EU.

Eg Jacob Rees-Mogg at Column 820 here on November 6th:


"Further to the point made by our hon. Friend the Member for Cheltenham (Martin Horwood), is it not the case that every member state of the European Union, with the exception of the United Kingdom and Denmark, is obliged to join the euro at some stage? When 25 out of 27 EU members are members of the euro, they will have a majority whatever voting system is cooked up."

As that was a debate on the Bill to approve the EU accession treaty for Croatia, and as that EU accession treaty says that Croatia will have to join the euro as soon as the entry conditions are deemed to be fulfilled, make that 26 out of 28 EU members.

And as the Latvian Prime Minister has recently said that he wants Latvia to join the euro in 2014, and the Latvians will not be allowed a referendum on that, make it 18 out of 28 for the time being.

Bugsy said...

Exploring the extremes of legality to remain in a currency which is strangling their economy seems futile. better to get on with planning an orderly exit so as to minimise the effects such an exit will have around europe and the world.

Jesper said...

I'm not sure there are that much left to decide:

-Greece is treaty-bound to use the euro.
If Greece could negotiate its way out of using the euro then that would mean that other countries also could renegotiate their terms of membership and obligations to abide by treaties. That would lead to EUrocrats losing power, influence and money so I'm fairly sure they'll fight it in every way they can.

-The Greek debt-load is too heavy, there'll be a(nother) default.

However, the date of the default is not yet decided. The allocation of losses as a result of the default is dependent on the date of the default. I.e. ESM or ECB to pay, or more accurately, which of them will be blamed as the same people end up paying anyway.

It will be interesting to see if the ECB will suffer losses on its bondbuying of Greek bonds before the OMT starts? If it were to happen, then the OMT might never get into play.

Idris Francis said...

Merkel has said again this week, in the EP, that all countries will be required to join the euro in due course. That at that same time as she said how much she wants Britain to remain in the EU.

Irresistible forces and immovable objects come to mind

If the Open Europe objective is to stay in the EU, but on competely different terms, might it be an idea to ask Merkel whether that would be acceptable, and include remaining out of the euro?

Rik said...

Merkel cannot say anything else in this situation. That is simply the legal situation and the legal situation should be backed (at least in public) in order not to jeopardize the strategy they use to try to save the Euro any further.
It is probably more Junckering than that she really means it. Same that she likes what the Greeks are doing and the Greeks are part of the team. She simply cannot say anything else (with this strategy). But I am pretty confident that she doesnot trust the Greek government as far as she can throw their finance minister. Greek reform speed makes a snail look like Usain Bolt and sometimes wishes somebody just made the country disappear from the face of the Earth.
This is EU stuff and in crisis, more than half the talking is Junckering. It first becomes news when she says something different than expected.

christina speight said...

This futile argument can go on for ever, Rik (and Open Europe). Greece is kept in the euro because Greece's sole utility to the EU is evincing solidarity with the EU. Tbat is , the Greek people are expendable, they can be pauperised, made serfs to their feudal overlords in 'Brussels' all to satisfy the power-lust of the demented clique dominating the EU.

There is only one way that Greece can hope to survive with a semblance of prosperity (in due course) and independence, That is to bite the bullet, face the chaos and face down her EU Overlords. Pity the Greek people don't seem to understand that.,

Us it not time for Open Europe to tell the unvarnished truth?

Denis Cooper said...

Rik -

As a declared eurofederalist it may be impossible for Merkel to say that the EU treaties must be amended to include a mechanism for a country to make an orderly withdrawal from the euro.

However Cameron, a declared opponent of eurofederalism, could have said that, and he could have insisted on suitable treaty amendments to that effect in exchange for the radical EU treaty change that Merkel started to demand in the autumn of 2010.

The fact that he didn't do that, and instead on March 25th 2011 he simply gave Merkel the treaty change she wanted without getting any other treaty changes in return in order to protect British long term national interests, might suggest to some that his public position is not his real position.

That he is, in reality, just as much a eurofederalist as Merkel, but he is a closet eurofederalist; just another Tory closet eurofederalist following the time-honoured practice of previous closet eurofederalist Tory leaders by stringing along Tory members and supporters with a show of opposition.

Anyway it's really too late now for the UK to get any quid pro quo for that radical EU treaty change ceded to Merkel to help her campaign to Save the Euro, because the UK Parliament has quietly approved the treaty change and that Act came into force on October 31st:


And thanks to a virtually complete media blackout, I doubt that even 1% of the UK population knows anything at all about it.

Jesper said...

I believe that the euro is not the cause of Greeces problem nor would its removal be a step to resolve those problems.

The problem is more likely to be found somewhere else:

On a side note:
EU institutions and treaties are in need of reform.

The almost nullification of the subsidiarity principle in the Lisbon treaty needs to be reversed:
If it isn't reversed, then EU institutions will work together in getting more duties/competences for themselves and then they'll be using those same additional duties/competences as justification for more money to be handed over to them. Leviathan was probably small as a young one but then as he/she was fed the growth started....

Merkel is right in that a new treaty is needed. Difficult to know what she'd like to have in it but the discussion should start as soon as possible so that it can be in place as soon as possible. Ideally a minimum level of commitment to EU institutions to be defined and the rest to be opt in.

Patrick Barron said...

Rather than forcing Greece to leave the EMU, the ECB should simply STOP buying Greek bonds and STOP accepting Greek bonds as collateral for euro loans. This would force Greece to abide by the decision of the market. Greece's positon vis a vis the ECB is analogous to to California's position vis a vis the Fed. A default by California does not necessarily imperil the dollar. It simply means that those who purchased California bonds may lose their money, which would force California to reform its budget. The ECB should honor its charter and CEASE purchasing sovereign debt and CEASE accepting sovereign debt for euro loans from any EMU nation.

christina speight said...

Jesper writes - -"I believe that the euro is not the cause of Greeces problem nor would its removal be a step to resolve those problems."

Of course it caused tbhe [problem by preventing exchange rate movements to adjust fort imballances in trade., And furthermore unless the euro goes there is no hope for Greece

Patrick Barron - - It doesn't matter HOW Greece arrives at the inevitable destination - the mechanics are available. But there is no will do reach that goal and the longer it is delayed the worse the consequences fre trhew Greeks.

Jesper said...


the currency isn't the root cause of this, if it was then we'd see:

-both Finland and Greece in trouble as both are on the EU periphery and both are using the euro.

Since we don't see it, that means that we need to investigate further to find the cause.

Banks willing to finance trade deficits that turned out to be unsustainable are more likely to be the root cause. If banks had cut their financing of the Greek trade deficits then the trade deficit would have disappeared. No credit means no trade -> rebalancing of trade.

And furthermore, if Greece doesn't deal with corruption and tax-avoidance among the elite then there is no hope for the average Greek as the average Greek can't afford being honest with taxes while being extorted for bribes.

The net effect of blaming the euro for the crisis is that focus is taken away from the necessary reforms of the banking sector and the need for increased transparency into government activities.

Rik said...

@Denis Cooper
I really do believe that Cameron has changed position in the mean time. If it was only to have a chance to get reelected.

Before he looked like to push the EU issue away and likely hoped it would blow over, but it didnot. He had to the choice to start a fight or something pretty close to that in Brussels or not get reelected. And he took the former. hard to see he will try to get away with some of the usual bogus. It is so clear that he won't get away with that and this simply looks like his last chance. Look these comments his credibility on the EU issue is very low he can simply not allow to waste more of that.

Same with Labour imho only they moved later. Also they saw that being pro-EU would not get them votes plus it might put pressure on Cameron. And very likley they saw as well that taking a rather similar pov as the Cons. would make it less likley that at an election UKIP voters would move to Cameron for strategic reasons (to keep Labour out).

Looks to me Cameron if he plays his cards right has a good position re the budget.
The EU messed up 2012 as well and need the money desperately so Cameron can bleed them on that as well.
Same with the East the legislation re structure funds ends 2013 if I am correct. If Cameron blocks that as an alternative for a budget cut, they (East) will lose more than with a budget cut.

Also looks to speed up the Treaty reneg. probably sees all the comments from Rollo and Christina and realises he doesnot have till 2015 or so. Plus the EU will simply need a new treaty one way or the other either to let countries out of the EZ and/or make the EZ work. I see no other option. Only EZ treaties will make a huge political and a legal mess of things they need an EU treaty change. Simply a consequence of the way the treaty was set up.

So summarised it looks he got them by the crown jewels. Only difficult for him to keep things going smoothly in Europe (low profile likley required for several reasons) and communication with voters and backbenchers.

Problem in the EU is still that they think it will be business as usual (at least the less bright half of them). But they will get the message sooner or later: Either give Cameron a treatychange he can come home with or have your budget blocked and/or permanently reduced by an UK exit and a solution for the EZ crisis possibly made impossible. They just have to realise which one is the least of 2 evils.
As most of the civil servants/burocrats are scared for their job and pensions, the East will see more money go with an Brexit than a budget cut and the EZ needs the UK to sign off a treatychange to rescue the Euro, 'Dave's' cards look pretty good.

After that the UK can decide hopefully be referendum if it is sufficient. As said earlier with so many unknowns in case of an exit this looks to me unless somebody comes up with a complete inventory and good plan how to solve the problems the by far best solution. For all the UK and the other EU countries.

Rollo said...

It is wrong to think that reality will push the EU to a decision. The decision will happen all by itself, and will put the EU 'decision makers' into the position of having to accept reality: which is that the euro is destroying nations.