And so the circus continues into another night.
It if far to early to tell what the outcome of tonight’s EU meeting to decide on Greece’s €130 bn bailout will be but the delay in anything meaningful suggests that once again the outcome will be underwhelming. As usual, the lead up to the meeting has been peppered with contradictory messages from attendees. The fact that the International Monetary Fund, European Central Bank and Commission reported over the weekend that Greece’s fiscal position is now even worse than expected probably hasn’t helped:
The International Monetary Fund now expects Greece’s debt to reach 129% of the country’s gross domestic product in 2020, three people with direct knowledge of a draft debt-sustainability analysis put together by the fund said on Sunday.
And that was with the bailout set at €136bn. However that wasn’t the worst of it. The same report contained a “tailored downside scenario” prepared for Eurozone leaders which outlines the case for debts to only fall to 160% of GDP by 2020 under the current bailout. Under that scenario, which given the IMFs constantly incorrect assessment of their own policies is probably most accurate, Greece will need €245bn in bail-out aid. This scenario is based on the premise that “there is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term”. That probably sounds very familiar to my readers.
The IMF has previously stated that the second bailout was only to be given on the proviso that Greece hits the 120% target. One of the questions out of today’s summit is whether the ECB will forgo its profits on the Greek bonds in order to provide additional funding for the program and what other concessions can be given by any sides. The (re-)negotiations with private sector creditors are also on going, but that should be no surprise given my previous statements on what a change in the holdings of Greek debt by the ECB would mean.
Those points aside, what has become apparent to me is the massive amount of political capital that has been destroyed by the mishandling of Greece’s economy by all of those involved. Comments from the Dutch finance minister, Jan Kees de Jager, and his Austrian counterpart, Maria Fekter, on their way into the summit sum this up. Firstly Jan Kees de Jager:
“When you look at the derailments in Greece which have happened several times now, it’s probably necessary that there is some kind of permanent presence of the troika in Athens not every three months but on a permanent basis.
“We will see to a rigid and very strict implementation of those demands and only then will we make the next step.
“I am in favour of more control, more supervision … Money is the thing we can control Greece with.”
And Maria Fekter:
“I believe states can’t make any more taxes available, that would overburden the states,” Fekter said.
“We would have problems getting that through parliament.”
And there in lies the political problem for Europe. There is very little political capital left in Greece to enact greater levels of reforms that are being requested such as a permanent Troika mission and/or escrow accounts, and there is limited amounts of political capital in the rest of Europe to support Greece any further. In fact, given Ms Fektor’s statements, I suspect that there is limited political capital available in many nations to provide any additional support to anyone.
The northern nations have obviously convinced themselves that the problem with Greece is the Greeks themselves, and in some regards that is true, however the fact is that much of the problem is simple economics and misguided ideology. Which brings us to Portugal:
The eurozone crisis has focused attention on debt-burdened Greece spiraling into decline. Meanwhile, Portugal is seen as the international creditors’ poster-child for obediently slashing spending and welfare benefits.
Nevertheless, the Portuguese national debt continues to grow, and the country is mired in recession and soaring unemployment.
….
Last May, Portugal received a $104 billion bailout from the European Union and International Monetary Fund, in exchange for deep spending cuts and structural reforms.
While the budget deficit was cut by more than a third, the economy is rapidly shrinking, consumption has plummeted, and unemployment has soared to 14 percent. Among the young, it reaches 30 percent.
This summit isn’t actually the end of anything. Even if it is successful in coming up with a new package for Greece the truth is that it is the beginning as periphery nations of Europe are going to require many years of complex support including large and fundamental changes to the structure of the European monetary system. If the political will across Europe is already dissolving because of the failed outcomes of Greece then I hold little hope for the long term sustainability of the Eurozone.