Euro

You know that the European Union is in trouble when Russia offers more intelligent advice on the eurozone’s debt crisis than Spain, the country that holds the EU’s rotating presidency.  Dmitry Medvedev, Russia’s president, disclosed the other day that he had recommended to George Papandreou, Greece’s prime minister, that the Greek government should request assistance from the International Monetary Fund to sort out its problems.

This is exactly the course of action advocated by several non-eurozone EU countries as well as a host of distinguished economists and, dare I say it, the editorial writers of the Financial Times.  As it happens, I don’t agree – if by IMF assistance we mean financial help.  The IMF will be involved, along with the European Central Bank, the European Commission and eurozone finance ministers, in monitoring Greece’s public finances and providing technical aid as required. Read more

Today’s European Union summit in Brussels will set out the framework for a financial rescue operation for Greece.  This much is clear is from various briefings being given by officials from countries as varied as Austria, Lithuania, Poland and Spain.  But financial markets will have to wait until next week to see the full details of the plan.

The central question is how far Germany has been pushed to swallow its words and offer help for Greece, after weeks of denying that it would do anything of the sort.  Only this morning Otmar Issing, the German former chief economist of the European Central Bank, was telling German television viewers that Greeks enjoyed “one of the most luxurious pensions systems in the world” and it was unreasonable to expect German taxpayers to fund it. Read more

An unambiguous message of solidarity among eurozone states will come from Thursday’s European Union summit in Brussels, but it is still unclear if this will translate into a specific financial rescue plan for Greece.  Debate among governments is continuing.  However, expectations in financial markets have been raised so high over the past 24 hours, what with European Central Bank president Jean-Claude Trichet flying in for the summit from Sydney and officials in Berlin hinting at a German-led rescue, that it would be risky for the EU leaders not to commit themselves to some sort of initiative.

There are various possibilities: bilateral loans from Germany and France, with perhaps Italy and the Netherlands chipping in; an International Monetary Fund-style standby facility, organised among the 16 eurozone countries; or an EU-wide loan, involving a show of support from all 27 member-states.  It is quite likely that the IMF will be asked to continue providing Greece with expert technical advice, but I don’t think the eurozone countries will go further and call on IMF financial resources.  Apart from anything else, there is a fear that the US may raise objections on the grounds that the IMF’s firepower should be reserved for fighting emergencies not in prosperous Europe but in other, more disadvantaged financial hotspots. Read more

The expression “it never rains but it pours” may seem inappropriate for a Mediterranean country such as Greece.  But it was the phrase that sprang to mind when I heard last week that Greek tax collectors are planning to go on strike in protest at the government’s austerity measures.  Like the political manipulation of budget data, the inefficiency of the tax system is one of the Greek state’s most glaring weaknesses.  How will a tax collectors’ strike help matters?

That said, I do not share the view of German and French government officials who insisted vehemently last week that the solution to Greece’s problems lies almost entirely with the Greeks themselves.  If this were the answer, nothing would be simpler than for the Greeks to roll up their sleeves and get on with a 10-year programe of wage restraint and productivity growth. Read more

There is a need to clear up some misconceptions about how Greece, or some other fiscal miscreant in the 16-nation eurozone, would be rescued by its partners in the event that it was unable to refinance its debts.

Quite a few commentators seem to think eurozone governments would find it hard to sidestep the ban on bail-outs specified in European Union treaty law.  The European Central Bank, the European Commission and certain EU governments, not least that of Greece itself, have contributed to the confusion by insisting in public that a rescue is undesirable and unnecessary (while quietly planning for precisely this contingency). Read more

Greece’s fiscal emergency is a most mystifying crisis.  At one level, it is the most serious test of the eurozone’s unity since the launch of the euro in 1999.  Unless correctly handled, the problem with Greece’s public finances could shake the foundations of Europe’s monetary union.

At another level, however, Greece itself seems to be getting off remarkably lightly.  Germany suffered a 5 per cent slump in gross domestic product last year; Greece is expected to have suffered a fall of about 1.1 per cent.  Spain has a 19 per cent unemployment rate; Greece’s rate is only 9 per cent.  The Irish government is imposing extreme austerity measures on its citizens to protect Ireland’s eurozone membership; Greece’s government is, so far, doing nothing of the sort.  No wonder Greece’s 15 eurozone partners, the European Commission and the European Central Bank are furious with the political classes in Athens. Read more

Buried in this month’s “Annual Report on the Euro Area 2009″ from the European Commission is some absorbing material on competitiveness in the eurozone.  Some countries, above all Germany, Europe’s export champion, have consistently outshone others in terms of business competitiveness since the euro’s launch in 1999.  The result has been the accumulation of large current account deficits in countries such as Cyprus, Greece, Portugal and Spain – but also in Ireland, Malta, Slovakia and Slovenia.

As the Commission says, in impeccably understated language: “The build-up of large external liabilities has increased exposure to financial shocks…  In the current downturn, financial markets have become more responsive to the net external financial asset position for the euro area countries.  Even if to a large extent the net external position is related to the private sector, the public sector can be affected by private sector debt in the form of potential bail-outs and other fiscal implications.” Read more

From a European Union perspective, it’s somewhat surprising that the extraordinary financial crisis we’ve been living through has not generated more pressure for another big push at EU integration – if not in the political sphere, then at least in the economic one.  According to conventional EU wisdom, it usually takes a crisis to make Europeans understand why closer integration is a good thing.  But on this occasion, it’s not happening – or at least, not yet.

For the perfect explanation as to why this should be so, I recommend an article by Otmar Issing, the European Central Bank’s former chief economist, in the latest issue of the journal Europe’s World.  Issing’s article discusses the merits of issuing common bonds for the 16-nation eurozone – an initiative that would, in theory, mark a major step forward in European integration – and comes down firmly against the proposal. Read more

Mikolaj Dowgielewicz is truly a new Pole.  Not yet even 37 years old, he is a minister (for European Union affairs) in Poland’s centre-right government, speaks fluent English and French, was educated partly in the UK, and has spent more of his life in an independent democratic Poland than in a Soviet-controlled communist Poland.  When I was listening to him speak at a think-tank breakfast in Brussels this morning, it struck me with force that he would have been just a small boy when I first visited Warsaw, Krakow and Gdansk in the summer of 1980 and witnessed the emergence of the free trade union Solidarity.

Now, like other new Poles, Dowgielewicz talks breezily about Poland’s growing weight in the EU, which it joined five years ago, and its prospects for adopting the euro as early as 2012.  Poland doesn’t want or need the eurozone’s entry rules to be bent, he says.  “We’re not proposing any amendments to the entry criteria.  Not that we think they make absolute sense, but it’s not feasible.  You’d have to change the EU treaties.  We think the criteria strengthen the eurozone’s credibility.  It will have to be down to the merits of each individual country.” Read more

There are two schools of thought on whether Latvia should devalue the lat, or fight tooth and nail to keep its currency peg to the euro.  One, espoused by the Latvian government, the International Monetary Fund  and the European Commission, is that devaluation would destabilise the Latvian banking system, wouldn’t really address the long-term challenges facing the Latvian economy, and would risk spreading shock waves beyond Latvia across the Baltic and into other parts of central and eastern Europe.

The other view, espoused by some of the world’s leading economists, such as Paul Krugman and Nouriel Roubini, can be summed up as: “Get Real”.  Without devaluation, the only path that Latvia can go down to extract itself from crisis is massive deflation, through spending cuts and sharp falls in wages that will inflict terrible damage on society and will unnecessarily prolong Latvia’s recession. Read more