EU can’t afford to let Greece fail

Greece's collapse would come at a horrendous social and economic cost to the European Union

The rescue plan for Greece announced last month by the EU and the IMF was never going to reassure international money markets. It lacked crucial detail and failed to address the key issue – how to drive down Greek costs of borrowing so that the country can cut its public deficit and limit economic contraction which would raise the real value of national debt and push the country towards bankruptcy?

This week's hike in interest rates on Greek bonds from about 6.3% to 8% (before falling back to 7.35%) – the highest since the euro was introduced in 2002 – shows that investors' confidence in the current strategy is draining fast. With it is Greece's ability to refinance its maturing debt. Thursday saw another sad record: the spread or difference between Greek and German 10-year bonds increased by over half a point to 4.63%. If Athens can't raise €10.5bn by the end of May (including $5bn on the US market for "sovereign debt"), then some form of bailout will become necessary.

The only option currently on the table is an IMF-led package of low-interest loans in exchange for an even more savage austerity programme. Whether Greece survives the current market pressure or calls in the IMF, the spectre of debt-deflation which has haunted Greece since last December is likely to become a self-fulfilling prophecy. A new economic recession would exacerbate the ongoing social recession, with soaring youth unemployment and more misery threatening the societal foundations of Greece's young democracy.

With growing market fears over contagion to other highly indebted euro members such as Portugal, Spain and Italy, Europe's social models and the European way of life are under threat – exactly what the much-maligned EU council president Herman Van Rompuy warned about in February.

But like ancient Greek mythology, this modern tragedy is by no means inevitable. The constricting shackles of fatalism can be broken by sound judgment and decisive action.

Supporters of an IMF-type solution – led by the iron chancellor, Angela Merkel, and the hawkish Bundesbank – argue that articles 123 and 125 of the EU's Lisbon treaty exclude a bailout by the community, its member states or the European Central Banl (ECB). However, article 122 clearly states that the European council can assist any member-state that is "seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control". Greece's ballooning budget deficit was certainly not caused by divine intervention. But like public deficits across the world, it has been greatly exacerbated by the consequences of the global credit crunch and speculation at the margins. Now that the Greek crisis is engulfing the rest of the eurozone, surely there's a compelling case to invoke article 122.

As for those who suggest that any bailout would be struck down by Germany's constitutional court and be rejected by the Bundesbank, it's perhaps worth remarking that in matters of public interest and the common good elected politicians should not leave final decisions to judges or central bankers. Rather, they should agree emergency measures and then revise the rules of the game in the light of recent and current experience.

This is perhaps the final chance for Europe's leaders to agree on a credible plan restructuring Greek debt. Concrete options include the purchase of Greek bonds by state-owned banks such as Germany's KfW, subsidising Greek interest rates or some form of ECB quantitative easing benefitting highly indebted countries. Here example include easing rules on using government bonds as collaterals for ECB loans or setting up a stand-by facility as the de facto lender-of-last-resort. None of this is uncontroversial, but failure to act now will greatly aggravate Europe's current predicament and raise the costs of any future rescue plan.

If Greece collapses and drags down the rest of the eurozone, the social costs and the political fallout will threaten the entire European edifice. That would cut short the nascent recovery and plunge the EU into a double-dip recession. Yesterday's announcements by the EU's statistics office Eurostat suggest that in the last quarter Europe's growth rate was zero and figures by the OECD show that economic growth in the first half of 2010 is predicted to be slow. Against this backdrop, calls by Van Rompuy for more European economic governance ring true – closer coordination of national fiscal policies (including debt reduction), coupled with shared public investment programmes for the benefit of all.

All EU member-states have a stake in the success of the EU's economic strategy for 2020. Instead of leaving it to the European commission, national representatives and the new council president must take ownership and come up with radical reforms. The union cannot afford another failure like that of the now defunct Lisbon agenda.

Adrian Pabst is a lecturer in politics in the University of Kent at Canterbury. Since 1998, he also been a research fellow at the Luxembourg Institute for European and International Studies. He is a frequent visitor to Central and Eastern Europe, Russia and Asia. Currently he is writing The Spectacle of Paradox, a book on market-states, crisis capitalism and the coming ideologies. He is a regular contributor to the international press on geopolitics, political economy, Europe and religion.

© Adrian Pabst

* First published by "The Guardian" (09.04.2010) at:
http://www.guardian.co.uk/commentisfree/2010/apr/09/greece-cant-afford-fail