Greece might finally start to pull away from its woes in the next few days because of a likely deal with its creditors to roll over at least €200 billion of government debt. That would make it easier for a second tranche of €130 billion to come in later this year.
But Greece’s economic problems are far from over. They hang like a Damocles sword over the Eurozone that includes all large European countries except Britain. The sword’s edge is the severe austerity program imposed on Greece by Germany, the only major player with a still strong economy although its prospects, too, have chilled slightly for 2012.
Germany’s Angela Merkel emerged as the economic queen of Europe this week, when she pushed through a new treaty to impose draconian budget discipline on all 27 European Union countries, except Britain and the Czech Republic. France’s Nicholas Sarkozy is in but was shoved back to second chair.
The treaty could take five years to jump the various hoops of European legislative processes. But a lament is already sighing in Brussels that the pact makes Keynesian style economics illegal, including bailouts and deficit spending for the public good. Some see new dangers because of this.
Whatever the later outcomes, news of the likely Greek accord and the somewhat vague Brussels pact have reduced jitters on the markets. There is cautious optimism that Southern European governments might get a long enough breathing space to push away prospects of default on debt and start restructuring to restore economic growth.
One reason for this positive note is that Greece seems to be winning its war with creditors with Merkel’s help. She has been adamant that creditors must take a haircut to share the cost of bailouts with tax payers and share the pain of those forced into austerity. Lenders made bad decisions when they overloaded Greece, Italy, Spain, Portugal and Ireland with debt. They are also partly responsible for the ignominy of lowered credit ratings, suffered even by France.
Lenders fought back with barrels blazing. But they are now constrained to take a 50 per cent drop in the value of their loans to Greece plus a drop of as much as three per cent in returns compared with the past 18 months. The rescheduling would be done at little less than four percent, down from over five per cent and more.
This bitter pill is being swallowed partly because Merkel has given in on another front. She was absolutely opposed to the European Central Bank acting like a lender of last resort to all 17 Eurozone members, similarly to what the Federal Reserve does for all the American States. The Fed actually prints money to provide liquidity. The ECB cannot print money but has used a couple of other ruses to provide almost unlimited credit to Eurozone banks for three to 10 years.
This has injected stability into Europe’s financial system by providing a psychological floor to the jitters of investors and improved the atmosphere for a Greek agreement in coming days and follow up to this week’s Brussels pact. It gave the signal that the EU and its component Eurozone are moving towards fiscal harmonization over time similar to a fiscal and economic union that would override national laws.
There could be many a slip twixt cup and lip but success can no longer be ruled out. A €500 billion European fund will enter into force in July, a year earlier than planned, to help heavily indebted members. At a European summit in March, it could be melded into another fund, making up to one trillion euro available for government bailouts. Another half trillion may become available through the International Monetary Fund, including money from non-European countries that fear excessive financial instability in Europe.
Absent new shocks to the global financial system, alleviation of the Euro crisis would help the world economy to mend led by mild recovery in the US, recession avoided in Europe, powerhouse growth in China and a return to growth in India.
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