After lots of speculation, and the usual European horsetrading, the EU finally got its act together last night and promised that, if push came to shove, it would step in to help out Greece.
I can't help but feel a bit sorry for Greek PM Papandreou. After getting elected last autumn, his first discovery was that the previous administration had been cooking the books – and, despite the Greek economy experiencing a relatively shallow recession (last year at least), the budget deficit had ballooned to almost 13% of GDP. With the Greek debt stock already in excess of 100% of GDP, Greece was suddenly looking down the barrel of fiscal insolvency.
To Papandreou's credit, he immediately owned up to the sort of false accounting that could land business leaders in jail, and then set out an austerity package of public spending cuts and tax rises to try and change Greece' debt dynamics. It wasn't enough for his euro area neighbours, though, who demanded more – so at the start of this month Greece pushed through even more painful cuts, to ensure the deficit falls by 4ppts of GDP this year.
That should have been enough to win support from its peers. And, initially, it looked like it was. The fantastically named Jean-Claude Juncker, chair of the Eurogroup of finance ministers, said on March 15 that the euro area would swiftly grant bilateral aid if Athens requested it. (Juncker, in case you were unaware, is both the Prime Minister and Finance Minister of Luxembourg. In truly European fashion, the leader of about half a million people – roughly half the number in Bristol's urban zone – chairs critical economic debates for a region with a population of about 330 million).
Unfortunately, Juncker forgot to get Chancellor Merkel's say-so. From day one of the euro – and even before, in truth – the Germans have been worried that, sooner or later, they would have to pay to clean up someone else's mess. So Merkel played hardball, hiding behind lawyers, of all things, who warned that any financial assistance might be illegal under German law. Merkel wanted the IMF involved. Solidarity, it seems, still doesn't translate that well from French into German. …. more