November 2, 2010
The EU summit in Brussels at the end of last week was focused on the thorny issues surrounding budget, borrowing and the financial crisis.
To be sure, this isn’t easy to get to grips with. Macroeconomics can be tricky enough as it is, but this brings multiple players, nations, policies, strategies and EU legislative procedures together in a geo-political game.
On the one hand, it is all high-level, government leaders, horse-trading and brinkmanship. On the other hand, as this very long but excellent article by Vanity Fair about Greek national finances suggests, the problems are as much – if not more – personal and social as national.
(If you don’t have the time to read it all, Michael Lewis reports on an enviroment where the payment of taxes is viewed almost as a crime by seemingly everyone in Greece. It is one thing to spend a lot and borrow to do it, but without an income source, you will be found out sooner or later. The only real question to my mind is that if this is true, why bail out Greece at all? Why not cut them loose?)
This video report offers an overview of the deal that has been reached at the summit:
[kml_flashembed movie="http://www.youtube.com/v/zvZo-ids_AY" width="425" height="350" wmode="transparent" /]
But an obvious question remains. How can you really enforce anything long-term?
I have seen many reports in the FT for example that suggest that Greece will default. It is simply a matter of time. When and not if.
This post by Open Europe and the underlying report seem to agree that the Euro cannot survive by budget discipline alone.
If some form of financial sanction is enforced for breaching the Stability and Growth Pact, that would cost an economy dearly when it is already in trouble. Everyone can see that, which is why the suspension of voting rights is now on the table.
But if austerity isn’t much liked by the general population, a suspension of voting rights – and therefore a removal of some level of democracy – won’t exactly be popular either.
As the former Danish Prime Minister and Leader of the PES in the European Parliament, Poul Nyrup Rasmussen describes in the above video, there is no incentive for all 27 Member States to vote this through. Why would Greece, Portugal, Ireland or Spain vote for this? It would be political suicide for their governments at home.
So is the euro any further forward? I don’t think so.
My only presumption is that financial penalties can be applied to euro members when they breach the Stability and Growth Pact – the next time around. Now it would be too dangerous. In a few years time it may be even more dangerous (all that debt being piled up for quantitative easing will need to be repaid sometime, possibly soon). In the longer-term, after some form of real recovery, not the worldwide jobless recovery we are seeing now, these rules could be implemented in time for the next recession / default / crash in 20 or 30 years time.financialguy