Tremoring under crisis Greece shakes EU, euro

The question being raised is whether the EU can fashion a mechanism to speed decision-making before irreversible damage is done and the euro itself slips into history. The delays are inevitable, most experts say, stemming from the nature of the EU and its own institutional voids: no single government, no single treasury, no effective fiscal coordination, no mechanism for crisis management.

Every major decision on the euro must be negotiated among member states and European institutions, a torturous process that also plays up political fissures both within and among member countries. That breeds uncertainty and even panic among investors, who already doubt that the Greek deal that the European leaders finally sealed, will forestall an eventual restructuring of Athens’ crippling debt.

While the US could “shock and awe” the markets early in the global financial crisis with the bailout money and a huge stimulus programme to restart the economy, there is no single European institution that can do the same. By contrast, every decision about Greece has been a painful, time-consuming bargain among the different national governments, with their own political requirements and concerns.

“There are no more bullets in the gun right now,” said a senior French official before the Brussels summit meeting. He confirmed the $140 billion relief package for Greece. The deal was reached over a period of months with the EU and the IMF. “Markets are reacting now because they think it’s too little, too late,”  Le Gloannec said. “And because it’s too late, it’s too little.” The European Central Bank, too, has been largely inadequate to the task  and failed to calm the markets with assurances that Greece would not default and that the bank was not be considering buying up Greek, Portuguese or Spanish bonds, which many analysts consider an obvious next step.

But investors  say that governments have no credible exit strategy, that Greek debts will need to be restructured and that the budget rules that are supposed to limit member nations’ budget deficits to 3 per cent of gross domestic product (GDP) have been used as a floor, rather than a ceiling.

Instead of dealing with these substantive matters, however, European leaders have sharply attacked the markets and the ratings agencies that have downgraded Greek, Portuguese and Spanish bonds.

European Commission President José Manuel Barroso, attacked financial “speculators.” Prime Minister José Luis Zapatero of Spain told traders to look at economic data instead of “unfounded off-the-wall suggestions and speculation.”

French minister for European affairs Pierre Lellouche, said in an interview about the ratings agencies: “I’d be interested to know what these 30-year-old boys know about the disaster they are causing to people in Spain or Portugal or anywhere else. Where states have to renationalise the losses and people are out of a job and out of their houses. Where’s the accountability of these judges?” But the problem is more fundamental, said Center for European Reform Chief economist Simon Tilford “Most of the time, the gap between European rhetoric and reality is just an annoyance,” he said. “But that gap is simply lethal when it comes to the euro.”

Instead of attacking markets and forming a new European agency, he said, “the leaders need to focus on the issue that is driving the markets: the dire growth prospects for the southern rim” of the euro zone, meaning Greece, Portugal, Spain and even Italy. No matter how big the loan package, “the only way to ensure debt sustainability is to get them growing,” he said, and that means significant structural changes to the euro zone.

The southern countries are so uncompetitive compared with the others, especially Germany, that there are permanent trade imbalances that will destroy the euro, Tilford said, unless European leaders either fix the imbalances or accept more political and fiscal integration. “But the course we’re on is unsustainable,” he said, and Germany seems uninterested in changing its economic model to benefit the poorer south. While individual countries will bear continual transfers of funds to poorer areas within the nation — to eastern Germany, for example, or to Corsica or Wales — “I don’t see the necessary social solidarity in the wider euro zone to provide this kind of fiscal supranationalism,” said  Tilford. “The myth of European integration and solidarity has been exposed as wishful thinking.”