Greece’s deficit stands at 12.7 percent which is four times higher than eurozone rules allow. Its debt is soaring towards half a trillion dollars with markets sceptical the country will be able to bail itself out. There is a strong possibility Greece, Spain or Portugal will default on its debts and require them to either abandon the euro or get an EU bailout. European governments have agreed to support Greece and are considering various options, including bilateral aid. German self-interest to keep the euro zone strong is likely to lead to an aid package from Berlin. It is also arguable Germany has a duty of care. Greece’s troubles originated when low interest rates inappropriate for Greece were maintained to rescue Germany from an economic slump.If the eurozone does not come to the rescue, a more desperate option would be to turn to the International Monetary Fund. The IMF helped Latvia and Hungary in 2009 but it hasn’t had to intervene in the eurozone. This would be a blow to the euro’s prestige and significantly the only support from the idea is coming from non-euro countries such as the UK and Sweden. Former Bank of England policy maker Charles Goodhart said while such a move would be a precedent, the amount of money required to rescue the Greek fiscal position is relatively minor. “I would ask the IMF to come in,” he said. “From the European point of view, it’s the least bad option.”
There are also untested legal issues as there is no clear procedure for bailing out a euro zone economy. Article 122 of the EU treaty says the EU Council can decide “upon the measures appropriate to the economic situation”, but should be used only if severe difficulties arise in the supply of certain products, notably energy. The treaty also states Council may grant, under conditions, financial assistance to a member state, if that state “is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control”.
The current difficulties were not beyond control. The Greek deficit got out of control due to a mixture of incompetence and deceit. Successive Greek governments had managed to pull the wool over the eyes of Brussels’ bureaucrats until the new Pasok Government doubled the projected GDP deficit from 6 to 12 percent late last year. Greece needs to raise almost $100 billion this year to refinance existing debt and keep paying salaries and pensions. Because most of that is front-loaded into the first six months, the government plans to raise 40 percent of it by April whatever the cost. To bankers this smacks of desperation and ratings agencies downgraded Greece’s credit rating making their loans even more expensive.
There are inherent problems within the eurozone. The currency cannot be devalued because it is used by 16 countries with economies in wildly differing states of health. While Greece’s ability to repay is being crippled by austerity measures, there is no way to lower the cost of the debt. Cuts inflicted on the eurozone’s weaker economies highlight a fundamental problem: the lack of a centralised budgetary mechanism, such as in the US, to move resources as needed around the EU. Gerard Lyons, chief economist at Standard Chartered said if monetary union is to survive, it has to become a political union. “If it doesn’t there is likely to be some sort of implosion and a move towards a two-speed Europe,” he said.