OPINION:THE EUROPEAN Commission has threatened to impose stringent fiscal measures on the Greek government if an already severe budget does not achieve the desired result. No matter how this psychodrama plays out, it will have reverberations throughout the euro zone, writes ARTHUR BEESLEY
At one level, the new strictures imposed on Greece suggest Ireland would have received similar treatment from Brussels if the Government did not take radical steps to bring the budget deficit to heel.
A year after Ireland and its shaky banks were besieged by the markets, the continued rise in unemployment and feeble tax revenues demonstrate that the storm has yet to pass. But decisive action, when finally taken, averted the threat of external intervention.
That is the spectre over Greece right now. The Socialist administration of prime minister George Papandreou has been on the ropes ever since it took office last autumn after it declared that the deficit it inherited would be more than twice the prior forecast – and the worst in Europe.
From a country that is widely perceived to have bent accounting rules to qualify to join the euro, the revision brought all financial information from Athens into question. Predictably, the markets took fright. That speculators took profit as is the nature of the business.
Papandreou needs to borrow some €50 billion this year to keep his ailing economy turning over. Already paying penalty interest for his borrowings, he has come under acute pressure to demonstrate that the corruption-prone administrative system in Greece can deliver an internal solution to its problems.
He has pledged good faith, stating bluntly that the country’s survival as a sovereign state is at stake. “We have to stop the country from falling over a cliff,” he said on Greek television two nights ago, as he cut the public sector wage bill and raised the retirement age.
His intentions are not in doubt, however. But questions over his capacity to deliver are implicit in the flash of warning lights in the financial institutions on which he depends for loans and in the European institutions to which he may yet have to turn for emergency aid. Europe aside, if banks didn’t lend to him the International Monetary Fund (IMF) would be in play. Neither prospect is appealing.
The response from Europe has been to engage in constructive ambiguity. The voices of authority declare in public that there would be no bailout for Athens, no rescue. In public, too, those same voices say the very notion of Greece being expelled from the euro zone is an absurdity not worth commenting on.
In private, however, it is readily conceded that Europe would have little choice but to intervene in the last resort to prop up a member of the family in distress. It is easy to see why to say so in public would invite trouble.
Thought was given to co-ordinated action with the IMF but this was ruled out, presumably because the Washington-based fund reserves the right to have a say over interest rates when intervening in a country. The independence of the European Central Bank would be compromised in that instance, threatening the very edifice of monetary union.
For now, the policy is to do everything possible to avoid the evil day. Hence the commission’s move to deploy powers in the Lisbon Treaty to increase oversight of the public finances at the same time as it reserved the right to foist additional measures on Athens against the administration’s will. It is already assumed that any extraordinary aid from Europe would come at a huge cost to the Greek people with swathes of fiscal authority essentially taken away from Athens.
The commission’s intervention carries a taste of that sour medicine without hard cash. For Papandreou, this tough love is portentous.
“We need to strengthen our instruments to monitor how the programme is implemented so as to avoid the slippages, to avoid that the objectives will not be reached,” said outgoing economics commissioner Joaquín Almunia.
“And if we consider that because of the weak implementation of the measures – or because of other factors – the objectives are not being achieved and the path of adjustment is not being followed, we will ask the Greek authorities to adopt as soon as possible additional measures to gain again credibility about the success of the programme reaching the objectives that are defined.”
Almunia was all smiles as he delivered the commission’s endorsement of Papandreou’s recovery programme, a package which the EU holds to be subject to risk. But he had only to cite the number of treaty provisions under which the EU executive would act to indicate that Athens is now at risk of being left out of the picture in its own affairs.
The commission is empowered under the clause in question to address a warning to a member state where it is established that its economic policies risk jeopardising the proper functioning of economic and monetary union.
The clause also empowers EU governments – on a recommendation from the commission – to address “the necessary recommendations” to the member state concerned. EU governments “shall act without taking into account the vote of the member of the council representing the member state concerned”. Grim stuff indeed. But it may just afford Papandreou and his government the political space required to execute swingeing cuts in the face of a likely backlash from the Greek public.
Meanwhile, attention is already turning to the difficult state of the public finances in Portugal and Spain. Fearful that they will be next to come under the market’s leer, austerity is inevitable in these countries too.
Even though Brian Lenihan’s budget in December received green flags from Brussels, the recovery plan suggests the budget deficit will not come within EU limits until 2014. It is a long, long road, with debts mounting by the day. But things could be worse.