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Azeem Ibrahim

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Saving Greece or Saving the Euro?

Posted: 07/11/11 05:44 PM ET

The EU's bailout is simply postponing the inevitable. Greece is about 300 billion Euros in debt, with a jobless rate of 16% (42.5% for youth) and its budget deficit is more than four times the Eurozone limit at 13.6% of GDP. Greece is nominally insolvent with a newly imposed austerity program which may or may not work and a disaffected population taking to the streets and squares in violent reaction. Only time will tell if Greece has been "saved" and there is considerable doubt about the future of the Euro.

Greece has reached this point through years of mismanagement and profligacy; its reporting to the EU consisted of "severe irregularities" based on "submission of incorrect data." Yet rescue has come in the form of an EU bailout plus the added contribution from the International Monetary Fund which provides a stringent monitor less prone to political pressures than a European institution might be. Greece has responded by passing the first of a series of austerity measures in its Parliament, ending immediate worries about a Greek debt default.

Pressure is now intense to put together a second bailout package, as the markets respond with what Sweden's Finance Minister, Anders Borg, has called "wolf pack behavior." Speculators and credit rating agencies are being blamed for trying to break up the monetary union to eliminate it as a potential rival to the US dollar as international reserve currency.

As the crisis deepens, Jean-Claude Trichet, President of the European Central Bank, is calling for a single Euro Finance Ministry to be formed to oversee fiscal and competitive policies and direct responsibilities for countries "in fiscal distress." This is seen as taking one step closer to a United States of Europe with a central fiscal policy, putting an end to the latitude in monetary affairs that has caused the recent crisis. The unpalatable truth becomes glaringly obvious -- the EU simply cannot afford to keep bailing out insolvent members, even with the help of the IMF. IMF members will soon get restless if their new head, Christine Lagarde, is too euro-centric in her funding allocations.

The Greek crisis has revealed a fault line so deep that it can no longer be ignored. The hypothesis of European convergence has failed to materialize. The imbalance between the Northern countries (Germany, France, etc) and the Southern (Spain, Greece, etc) is growing rather than shrinking. Since the introduction of the euro in 1999, GDP averages have drifted apart by as much as 11% and distinct groups of debtor and creditor countries have emerged. The dream of European monetary convergence has soured, and a Greek EU Commissioner, Maria Damanaki, said on May 25, 2011, "The scenario of removing Greece from the euro is now on the table." This was contradicted by Greece's Prime Minister, George Papandreou, who insisted he was determined to keep Greece in the Eurozone, but the issue is still very much alive.

However, with France and Germany committed to bailing out the weaker countries, a breakup of the Euro does not look likely in the short term. How important to Europe is the survival of the Euro? The European Union existed for decades before the Euro and a number of successful EU countries have refused to join the Eurozone, notably Great Britain, Sweden and Denmark. One alternative is to forget about convergence and return to an "asymmetric architecture" with Germany as the benchmark economy. Germany's trade surplus has already caught the attention of Christine Lagarde, the new IMF head, who warned in a Financial Times article on March 15, 2010, that Germany's position could be unsustainable. If Germany's strength has become a problem, as is Greece's weakness, then it emphasizes again the difficulty of creating a one-size-fits-all fiscal and monetary policy for 16 countries.

Perhaps it is time for the EU to not just swallow its pride and ask the IMF for help, but to take a deeper swallow and allow the weaker economies to secede from the Eurozone, releasing the others from their obligation to keep bailing them out. But this is not the overruling concern of the IMF. "The IMF does not bail out poor nations. It bails out banks in rich nations that have made imprudent loans to poor nations." The French and German banks that made those loans to Greece, Portugal and Ireland have to be protected and it is the survival of the banks, not the welfare of the people of the EU, that is the primary goal of both the EU and the IMF.

EC President Jose Manuel Barosso, said in his first State of the Union address on September 7, 2010, "Europe must show that it is more than 27 different national solutions. We must swim together, or sink separately." Somebody should look more closely to see whether the Euro is still swimming or instead, drowning.

Dr Azeem Ibrahim is a Fellow and Member of the Board of Directors at the Institute of Social Policy and Understanding and a former Research Scholar at the Kennedy School of Government at Harvard and World Fellow at Yale.

More writings here: www.azeemibrahim.com

 
 
 

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