The View from the West

Winnipeg Free Press - PRINT EDITION

Greek extravagance puts pressure on Europe and the euro

By: The Economist

Posted: 02/8/2010 1:00 AM | Comments: 0 (including replies)

Since the launch of Europe's single currency, there have been theoretical worries about profligacy. The main fear was that free-spending countries (i.e., Italy) might borrow excessively and pass either higher interest costs or the bill for a bailout on to their sober, frugal brethren (i.e., Germany).

Eleven years after the euro's birth, as Greece skids towards disaster, those vague fears have become an urgent question of policy. The first attempt to deal with profligacy, the comically misnamed stability and growth pact, was never going to work. Neither the threat of fines on miscreants unable to afford them nor the euro area's ban on bailouts was credible.

Yet in the past few months, Greek bond yields have widened spectacularly against German ones, as lenders have rightly begun to ask what plans there are for euro-area countries in trouble -- and, in the silence that followed, to fear a sovereign default.

The aversion of most euro-area countries to a bailout is understandable, even laudable -- nothing would encourage reckless spending like the knowledge other countries were ready to step in. Greece is especially undeserving. Although some of its problems have been brought on by global recession and by speculators, almost all the blame lies at home. Blatant Greek fiddling with the national accounts to disguise government borrowing has shot to pieces the country's credibility, both in the markets and with other euro-area members. Deep structural weaknesses in the Greek economy have been left to fester.

For a decade or more, Greece has lived far beyond its means. Savage austerity is now inevitable.

There is plenty of money around. The EU can advance structural-fund aid that is due to be paid in future years. The European Investment Bank can lend more. There may even be scope for a direct EU loan (but not one from the European Central Bank, which under the Maastricht treaty should not bail out euro-area governments).

The harder question is how to ensure any help does not undermine reform -- that it comes with conditions that promote sound policies, including deep budget cuts and structural reforms.

What Greece needs is an outside agency to urge the government on and stiffen its resolve to face down protests, if necessary. The answer is to turn to the IMF.

Many in Greece (and the rest of Europe) see calling in the IMF as a humiliation, for the euro as much as for Greece. They also fear stringent IMF conditionality. Yet stringency is just what is needed.

In principle, the European Commission could monitor performance and impose conditions (or a new European Monetary Fund might do so). But because Greece is a full member of the EU and the euro, any European lender would find it hard to convince markets it could hang tough against political pressure and social protests.

In contrast, the IMF is independent, can afford to be unpopular and has experience of bailing out indebted governments. It is true the fund's role in a single-currency zone would be to help avert a sovereign-debt crisis, not to offer classical balance-of-payments support. But its expertise in drawing up austerity measures and reform programs would be just as valuable.

It may be embarrassing for a euro member to need the fund's assistance, but the Greeks should be ready to turn to the IMF before they lumber themselves with an even worse fate.

Republished from the Winnipeg Free Press print edition February 8, 2010 A12

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