Sticks and bail-outs

European leaders have been incoherent over whether

to punish or help Greece
Apr 15th 2010 | From The Economist print edition

IN JANUARY the clever talk in Brussels was about how to rush European Union
money to Greece (and thereby save the euro). A popular idea involved speeding
up billions in EU “structural funds”, or aid for poor regions, earmarked for Greece.
Now the clever talk in Brussels is about making governments clean up their
budgets and reform their economies (and thereby save the euro). And one idea is
to threaten errant countries with the suspension of EU structural funds.
A niftier move would be to combine the two. The European Commission might
front-load the payment of structural funds and a Eurocrat (chosen for his stocky
build and personal honesty) could fly to Athens with a suitcase full of cash. Then
EU finance ministers could suspend the funds by a majority vote (with Greece
denied its say)—and the cash-toting Eurocrat could turn round and catch the
flight straight back home.
As this little story suggests, the Greek crisis has hardly shown the European
Union at its most coherent. One reason has been denial. In January the German
government was “not considering” financial aid to help Greece out of its
budgetary hole. At an EU summit in February, the German chancellor, Angela
Merkel, agreed that countries of the euro area should take “determined and co-
ordinated action” to defend Greece, but blocked discussions of what that meant
(and opposed any role for the IMF).
A month later Mrs Merkel said countries that repeatedly broke the rules of the
euro should face expulsion, pleasing German voters enraged by the idea of bailing
out a country that has lied about its budget deficit and allows favoured workers to
retire at 50. A week later, at yet another summit, Mrs Merkel set harsh conditions
for a rescue, though this time she insisted that the IMF should be involved after
all. Greece would have to pay market rates for loans from EU neighbours, but
could get them only if borrowing from markets was impossible.
This hard German line was partly political (a big state election looms in May) and
partly legal (a Greek bail-out could be challenged in Germany’s constitutional
court for breaching the no-bail-out terms of the Maastricht treaty). Yet it was
also, in the words of a senior official, “not realistic”. EU leaders promised Greece
(a small economy) that it would not be abandoned. France, Italy and Spain were
determined to honour this pledge. A telling detail is that German banks are big
holders of Greek debt.
Now Germany is on the hook for its share of a €30 billion ($41 billion) package of
bilateral loans for Greece, unveiled on April 11th. This is not a bail-out, German
officials insisted. At their suggestion, the IMF would add its own money, and
although the cost of borrowing would be below market rates, it would still be
painful. They even added, valiantly but surely vainly, that Greece might never
need the loans.
European politicians are also in denial about the role of markets, at least in
public. Leaders such as Nicolas Sarkozy of France endlessly declare that the
financial markets are acting as “speculators”: ie, not as rational or legitimate
actors. In late January the Spanish and Greek prime ministers murmured darkly
that sinister political and financial interests were picking on Greece to try to
destroy the euro.
Yet when euro-area governments agreed to lend money to Greece at a hefty
premium over the benchmark rate paid by Germany, they were implicitly
conceding both that markets had a legitimate point (ie, that not all governments
are equally creditworthy) and that market forces can be useful (higher borrowing
costs are a vital tool to discipline Greece). Some speculators have certainly aimed
at Greece. The Belgian finance minister, Didier Reynders, boasted that his country
would “turn a profit” on the billion euros it is due to lend Greece by borrowing the
cash at rates below those Greece would have to pay. Perhaps speculation is not
wicked when governments indulge in it.
EU leaders now call for a new system of “European economic governance” to spot
instabilities in the euro area. Sensible things are in the air, like EU audits of
national accounts and fiscal surveillance to spot problems sooner. There are calls
to discuss imbalances that threaten the whole zone, such as weak domestic
demand in some countries, an addiction to credit-fuelled consumption in others or
big losses of competitiveness.

No great leap forwards

Yet this is not the leap to closer European political integration that some have
excitedly hailed. In reality the EU is planning the same things as before—strict
budget discipline and policies aimed at convergence—but with more conviction. Is
that credible? It does not help that the two countries calling loudest for discipline
are France and Germany, which were responsible for gutting the euro area’s
stability-pact rules on budget deficits a few years ago when they were threatened
by them.
EU governments are sure to present any Greek bail-out as a triumph of political
will over markets. But in truth, markets may offer the most credible assurance
that discipline could actually bite. EU leaders have repeatedly blustered to conceal
their divisions over a Greek bail-out. Markets forced them to say what they
meant. Greece has been paying twice as much as Germany to borrow money.
That is a sanction more painful than anything the EU would ever have the will to
impose.
Even as Brussels types debate the theology of economic governance, the
commission is limbering up to rebuke a string of countries for running excessive
deficits. The markets will be paying attention as never before, with real
consequences for national borrowing costs. Markets are not always right or fair.
But market pressures are real and unflagging. Judging by the Greek crisis so far,
that is more than can be said of the EU’s political will.
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