Europe Saves Greece—for a Little While
Eurozone leaders and the International Monetary Fund (imf) reached yet another agreement to save Greece in the early hours of November 27, after a 13-hour meeting. Like previous agreements, this one has no chance of solving the problems in Greece, let alone in the rest of the euro. It’s yet another Band-Aid—but Germany hopes it will postpone tough decisions until after its 2013 elections.
Last week, eurozone leaders met and failed to agree on a way forward. According to Spiegel Online, the “unpleasant haggling that ensued was something even long-serving Brussels officials had rarely experienced.”
“Whenever an idea was proposed, the representative of one country or another had an objection,” it wrote.
But the biggest obstacle was a fundamental fallout between Germany and the imf. The imf demanded eurozone lenders forgive some of the debt Greece owes them. Germany claimed it would be illegal to keep lending money to Greece at the same time it is writing off other debt. However, that hasn’t stopped Germany before. The more likely reason is that Chancellor Angela Merkel doesn’t want to tell German taxpayers that they must take a loss on the Greek loans right before an election.
This week’s deal is a messy compromise, even by EU standards. Germany got its way, for now. Nations will not have to write off Greek debt. Instead, they will charge Greece a lower interest rate on loans in the first bailout package. They will delay collecting some of the interest on the second bailout. The European Central Bank will give Greece the €11 billion in profit it has made in the process of propping up Greek bonds. And some Greek bonds will be bought back. That hodgepodge of measures satisfied the imf, and Greece will receive its bailout money once it’s been approved by national parliaments. The imf will release its money once the Greek bond buy-back has been completed.
“We think that Greece will eventually need a much larger debt relief, but any agreement on this is unlikely to happen before German elections next fall,” said Tullia Bucco of UniCredit Research.
Another major flaw of the agreement is that it will only succeed if Greece’s economy soon begins growing rapidly, the way Greece’s creditors predict it will. Their predictions are pure wishful thinking. As this post from Zero Hedge demonstrates, the troika of lenders are predicting that Greece has been on the brink of growth for years.
This agreement also makes things worse for the eurozone’s other indebted states. Spain and Italy will be borrowing money in order to lend to Greece, just as they’re doing now, except they’ll be charging Greece a lower interest rate than the rate they pay to borrow the money in the first place.
Ahead of the meeting, Der Spiegel predicted the agreement would postpone the problems for merely a matter of months. “But whatever the Euro Group decides to do now, it will not last until the German parliamentary election in September 2013, as Merkel and Schäuble would like,” it wrote. “One senior official involved in the talks ventured a sober prognosis: ‘In the spring, we’ll have to revisit this junk again.’”
This isn’t the only can EU leaders have booted down the road. The chief economist at the World Bank, Kaushik Basu, predicted that the €1 trillion the European Central Bank (ecb) used to prop up eurozone banks last winter will come back to haunt the world in 2014 and 2015. The ecb gave the money to the bank in the form of three-year loans. When those loans are due back, “we’re going to get another big rocking of the global economy,” Basu said.
“I don’t think the ecb had any other choice,” he said. “But when you bought time, you have to do things with the time you bought, otherwise the crisis will come back. And there’s a danger of that.”
That is all most of the EU’s responses to the euro crisis have been doing—buying time. Europe still needs a revolution to solve the contradictions within the single currency. At the moment, the eurozone is halfway to becoming a superstate. It can either move forward, or fall apart. But its current situation is unsustainable. Watch for the eurozone crisis to eventually force EU leaders to create a superstate.