It Was a year ago that the European Union produced its big bazooka to quell the euro area’s sovereign-debt crisis: a €750 billion fund to safeguard the single currency, following within days of the €110 billion bail-out of Greece. It did not work. Ireland has since been bailed out, and a rescue of Portugal is in the works. Greece looks closer than ever to defaulting, or at least to having its debt restructured.
After a year of muddling along, the EU seems more muddled than ever. The disarray was painfully apparent over the weekend. News of a secret meeting of selected European finance ministers (including Greece's man, George Papaconstantinou, pictured above) in Luxembourg on May 6th was promptly leaked. Der Spiegel reported that Greece was considering leaving the euro zone; the briefing note for the German finance minister, Wolfgang Schäuble, made clear this would be economic suicide. It would greatly expand (perhaps double) Greece’s debt burden, provoke capital flight, cause turmoil across Europe’s banks and endanger the country’s membership of the EU. Greece described the report as "borderline criminal".
Indeed, the idea of Greece giving up the euro has now generally been accepted as nonsense, but not before another upheaval in the markets (Greece was downgraded again by Standard & Poor's yesterday). The notion of Greece leaving the EU was “stupid”, declared Jean-Claude Juncker, the prime minister of Luxembourg (who presides over the euro area’s group of finance ministers), after hosting the meeting that his officials denied was taking place. Mr Juncker is, after all, the man who argued against transparency in decision-making, saying he was all for "secret, dark debates". He may think this is a sign of seriousness in economic policy, but this weekend he came across as incompetent.
It is possible that the meeting caused such confusion that the ministers felt compelled to rule out one option that is being discussed more and more openly: restructuring Greek debt because of the country's inability to repay its loans, or even to balance its books, as austerity measures worsen the country’s recession.
So for now, it is the EU’s rescue plan that is being restructured. “We think that Greece does need a further adjustment programme”, said Mr Juncker. The details will be worked out at a meeting of finance ministers next week. The country is in no state to start tapping back into markets next year, as envisaged in its current bail-out plan. So European countries are likely to extend more assistance to Greece.
The options include giving it more time to meet its deficit-reduction targets (its budget deficit was 10.5% of GDP last year, a long way off its 8.1% goal), softening the terms for its current bail-out (by again reducing the interest rate or again stretching out its repayment schedule), issuing new loans, or having the EU buy new Greek bond issues in future. Mr Papaconstantinou suggested this last option was under active discussion. Ireland hopes it, too, will benefit from the rethink on Greece.
Plainly, the crisis requires fresh thinking. But so far the EU remains doggedly on its year-old path. First, do what is necessary, but no more than that, to avert a financial collapse in euro-area member states. And second, play for time in the hope that troubled economies will start to grow out of their difficulties, or at least until Europe’s banking sector strengthens sufficiently to cope with the losses on restructured government debt. Above all, push the problem beyond the political horizon of the euro area's main leaders: the 2012 presidential election in France, and the 2013 parliamentary election in Germany.
After a year of muddling along, the EU seems more muddled than ever. The disarray was painfully apparent over the weekend. News of a secret meeting of selected European finance ministers (including Greece's man, George Papaconstantinou, pictured above) in Luxembourg on May 6th was promptly leaked. Der Spiegel reported that Greece was considering leaving the euro zone; the briefing note for the German finance minister, Wolfgang Schäuble, made clear this would be economic suicide. It would greatly expand (perhaps double) Greece’s debt burden, provoke capital flight, cause turmoil across Europe’s banks and endanger the country’s membership of the EU. Greece described the report as "borderline criminal".
Indeed, the idea of Greece giving up the euro has now generally been accepted as nonsense, but not before another upheaval in the markets (Greece was downgraded again by Standard & Poor's yesterday). The notion of Greece leaving the EU was “stupid”, declared Jean-Claude Juncker, the prime minister of Luxembourg (who presides over the euro area’s group of finance ministers), after hosting the meeting that his officials denied was taking place. Mr Juncker is, after all, the man who argued against transparency in decision-making, saying he was all for "secret, dark debates". He may think this is a sign of seriousness in economic policy, but this weekend he came across as incompetent.
It is possible that the meeting caused such confusion that the ministers felt compelled to rule out one option that is being discussed more and more openly: restructuring Greek debt because of the country's inability to repay its loans, or even to balance its books, as austerity measures worsen the country’s recession.
So for now, it is the EU’s rescue plan that is being restructured. “We think that Greece does need a further adjustment programme”, said Mr Juncker. The details will be worked out at a meeting of finance ministers next week. The country is in no state to start tapping back into markets next year, as envisaged in its current bail-out plan. So European countries are likely to extend more assistance to Greece.
The options include giving it more time to meet its deficit-reduction targets (its budget deficit was 10.5% of GDP last year, a long way off its 8.1% goal), softening the terms for its current bail-out (by again reducing the interest rate or again stretching out its repayment schedule), issuing new loans, or having the EU buy new Greek bond issues in future. Mr Papaconstantinou suggested this last option was under active discussion. Ireland hopes it, too, will benefit from the rethink on Greece.
Plainly, the crisis requires fresh thinking. But so far the EU remains doggedly on its year-old path. First, do what is necessary, but no more than that, to avert a financial collapse in euro-area member states. And second, play for time in the hope that troubled economies will start to grow out of their difficulties, or at least until Europe’s banking sector strengthens sufficiently to cope with the losses on restructured government debt. Above all, push the problem beyond the political horizon of the euro area's main leaders: the 2012 presidential election in France, and the 2013 parliamentary election in Germany.
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