According to various news sources over the weekend today is Greece’s D-Day. I doubt very much whether that is actually the case due to the seriousness of the situation, but there is no doubt that time is running out for all parties involved to make a decision about Greece’s immediate future:
Euro zone finance ministers told Greece on Saturday it could not go ahead with an agreed deal to restructure privately-held debt until it guaranteed it would implement reforms needed to secure a second financing package from the euro zone and the IMF.
Euro zone ministers had hoped to meet on Monday to finalize the second Greek bailout, which has to be in place by mid-March if Athens is to avoid a chaotic default. But the meeting was postponed because of Greek reluctance to commit to reforms.
Instead, the ministers held a conference call on Saturday to take stock of progress on the second financing package, which euro zone leaders set at 130 billion euros back in October.
“There was a very clear message that was conveyed from all participants of the teleconference … to the Greeks that enough is enough,” one euro zone official said. “There is a great sense of frustration that they are dragging their feet.
Dragging their feet, or being dragged by the feet? I guess it depends on your perspective as Greece is caught in a deadlock between a deal with private and official creditors. The trouble is that the private sector do not appear to want to accept a deal that satisfies the demands of the official sector, which means Greece is required to make even greater cuts to satisfy Europe in order to get its next bailout.
These cuts include a 25 per cent cut in private sector wages, 35 per cent in supplementary pensions and the closure of approximately 100 state-controlled organisations. This will immediately lead to a re-newed round of job losses on top of lower incomes which appears to be a step too far for Greece’s politicians but European official are refusing to agree to the private sector restructuring plan in order to force through their requests.
So far there is no deal which has lead to an acceleration of the frustrations surrounding Greece:
The Greek finance minister, Evangelos Venizelos, said on Saturday that talks between the government and its foreign creditors on a second rescue deal were “on a razor’s edge,” adding that though progress had been made on some levels, crucial issues were unresolved.
Agreement was reached on issues like recapitalizing Greek banks and the privatization of state assets, Mr. Venizelos said.
“Two major, interrelated issues remain unresolved — labor relations and wages in the private sector, and the fiscal measures that must be taken to ensure we are within the target for 2012,” Mr. Venizelos said after a two-hour conference call with euro zone officials. Despite the barriers, a deal must be reached in bailout talks by Sunday night, he said.
As MacroBusiness readers would be aware, the Private sector talks ( the PSI+ ) have been going on for months and while they have Greece’s financial position has continued to deteriorate with another 15 billion euro gap appearing in the last 2 weeks. For a number of reasons the current approach to Greece is failing and it is time for decisions to be made. Greece must either meet all demands of the Troika to receive the next payment, or it will default.
As I type this post the news out of Greece is completely confused. Half the media is reporting that after a 5 hour meeting with Greece’s 3 party leaders Lucas Papademos has been unable to get a consensus with the party leaders refusing to accept the new conditions of the bailout. The other half is reporting that Mr Papademos has released a statement saying there is agreement on an additional 1.5% GDP cut to spending along with other concessions. These statements seem at odds with other reports of Antonis Samaras, the leader of the centre-right New Democracy party, stating “They’re asking for more recession than the country can take”. All media outlets are reporting that talks will continue on Monday, so it is likely this isn’t over.
Once I get some clarity on the situation I will put up another post, but the Greek unions have just announced yet another strike against austerity which isn’t going to make the official sector particularly happy.
Moving on from the Greek debacle to some important things happening behind the scenes in Europe. Back in December last year the European Summit agreed on what had come to be known as the “six pack”. These were a set of 5 regulations and 1 directive ratified by the EU leaders with the aim to ‘ensure future fiscal discipline’ in the Eurozone. Part of this package was a well overdue framework for monitoring macro-level imbalances across the zone:
Reducing macro-economic imbalances
Over the past decade, the EU has registered serious gaps in competitiveness and major macroeconomic imbalances. A new surveillance and enforcement mechanism has been set up to identify and correct such issues much earlier: the Excessive Imbalances Procedure (EIP), based on Article 121.6 of the Treaty. It will rely on the following main elements:
– Preventive and corrective action: The new procedure allows the Commission and the Council to adopt preventive recommendations under article 121.2 of the Treaty at an early stage before the imbalances become large. In more serious cases, there is also a corrective arm where an excessive imbalance procedure can be opened for a Member State. In this case, the Member State concerned will have to submit a corrective action plan with a clear roadmap and deadlines for implementing corrective action. Surveillance will be stepped up by the Commission on the basis of regular progress reports submitted by the Member States concerned.
– Rigorous enforcement: A new enforcement regime is established for euro area countries. It consists of a two-step approach whereby an interest-bearing deposit can be imposed after one failure to comply with the recommended corrective action. After a second compliance failure, this interest-bearing deposit can be converted into a fine (up to 0.1% of GDP). Sanctions can also be imposed for failing twice to submit a sufficient corrective action plan. The decision-making process in the new regulations is streamlined by prescribing the use of reverse qualified majority voting to take all the relevant decisions leading up to sanctions. This semi-automatic decision-making procedure makes it very difficult for Member States to form a blocking majority.
– An early warning system: an alert system is established based on an economic reading of a scoreboard consisting of a set of ten indicators covering the major sources of macro-economic imbalances. The composition of the scoreboard indicators may evolve over time. The aim of the scoreboard is to trigger in-depth studies which will do deep dive analyses to determine whether the potential imbalances identified in the early-warning system are benign or problematic. The Commission can organise missions, with the ECB if appropriate, to conduct the in-depth reviews which shall be made public.
Planned scoreboard
- 3 year backward moving average of the current account balance as a percent of GDP, with the a threshold of +6% of GDP and – 4% of GDP;
- net international investment position as a percent of GDP, with a threshold of -35% of GDP;
- 5 years percentage change of export market shares measured in values, with a threshold of -6%;
- 3 years percentage change in nominal unit labour cost, with thresholds of +9% for euro-area countries and +12% for non-euro-area countries.
- 3 years percentage change of the real effective exchange rates based on HICP/CPI deflators, relative to 35 other industrial countries, with thresholds of -/+5% for euro-area countries and -/+11% for non-euro-area countries;
- private sector debt in % of GDP with a threshold of 160%;
- private sector credit flow in % of GDP with a threshold of 15%;
- year-on-year changes in house prices relative to a Eurostat consumption deflator, with a threshold of 6%;
- general government sector debt in % of GDP with a threshold of 60%;
- 3-year backward moving average of unemployment rate, with the threshold of 10%.
Although I consider the resolution framework to be faulty because the corrective actions are far too one-sided it is important that Europe has a framework in place to monitor and recognise these issues. What makes this monitoring so positive is that not only are government finances being monitored but the private and external sectors as well. This in itself is a big step-forward.
Since December the economic indicators scoreboard has been finalised and there have been a number of presentations provided to European leaders about the new framework. An example is the one at the bottom of this post provided by the President of the European Commission at last weeks EU summit.
The reason I mention this is because in 2 days time, on Feb 8th, the first report under the new framework is to be delivered by Olli Rehn:
This assessment is based on an economic reading of a scoreboard of selected economic indicators. This will be the first time the Commission presents this report since strengthened rules on economic governance, the so-called “six pack” entered into force on 13th December 2011
This report is likely to have a large bearing on the economic policies of Europe over the next few years, so I consider it to be quite important. I just hope that the responses to the problems are far more holistic than what we have seen so far.
Thank you to AnonNL for some of the information provided in this post.