THE GAMBLE is that the very existence of a potential European Union rescue package for Greece will obviate its necessity. “The Brussels agreement wipes out the risk of default, the refinancing risk and raises the credibility of the government’s austerity plan,” Petros Christodoulou, head of the Greek debt agency, claimed optimistically yesterday. And, indeed, the financial markets responded to the EU summit agreement by narrowing the spread - or risk premium - on 10-year Greek bonds over comparable German securities. That may not be enough for Greece’s cash-strapped finance minister but it is a step in the right direction.
The agreement in principle on a loan bailout and an accompanying commitment to improved EU “economic governance” represents a landmark moment for the EU and the single currency. And it comes despite serious reservations in some member states: in Berlin – about the danger of rewarding irresponsibility, of “moral hazard”; in Paris – about involving the International Monetary Fund (IMF) in an internal EU matter; and in London and Warsaw – about talk of economic governance, or worse still in the first draft declaration, “economic government”.
The deal is a recognition that the architecture of the euro system is deficient. It was devised on the assumption that the strict rules for membership and the gentle hand of the European Central Bank (ECB) would somehow guarantee long-term stability. Not so. As Germany’s chancellor Angela Merkel said after the summit “We had to answer the question: how can people place long-term trust in the euro as a stable currency and how can a currency union combine solidarity and stability? In this context, we really broke new ground”.
The complex structure of any actual rescue package, should the worst happen, would include roughly two thirds bilateral loans from euro member states. These would be subject to commission control and to stringent terms and, crucially, would require the unanimous agreement of euro zone countries, giving each of them a veto. The loans would be topped up by a contribution from the IMF which would certainly want to set its own terms. Exactly how it would relate to the ECB and commission in this regard has yet to be determined.
With the share of any of individual euro-state’s loan to Greece pegged to its individual share capital in the ECB, Ireland’s obligation would be to 1.64 per cent of the member states’ contribution – in a worst-case scenario of a total bailout, of say €25 billion, that would mean Dublin lending some €280 million.
The devil will be in the detail and formulating new procedures for collective governance and economic supervision has been delegated to a taskforce chaired by European Council president Herman Van Rompuy. He has been given until the end of the year to come up with new procedures “exploring all options to reinforce the legal framework”. That could mean treaty changes, although after being badly burned by the Lisbon ratification debacle, most member states - Ireland included - will shy away from that option if they possibly can.