Monday, 15 March 2010

Bailing out Greece – to help the Euro?

So Greece will really be bailed out by the EU? So it seems, even if there will be a good deal of smoke and mirrors making the support package look better than it really is. It will mainly be a series of measures, allowing Greece to finance her existing debt at better conditions than currently offered by the market, while maintaining the pressure on the Greek government to improve public finances. Personally, I do not believe that Greece will receive any support except for some loan guarantees.

But the whole Greece episode points importantly to two aspects of the current Euro cooperation. One is the cultural differences between north and south. The other is the political importance of the Euro, often overlooked by the financial markets.

When digging into the Greek public finances, it quickly becomes clear that profligate spending indeed is a problem. But that haphazard tax collection is a far bigger problem. Greece may make one ambitious budget after the other, but realistically, government finances will not improve visibly on this side of 2015 unless tax collection is improved. As opposed to Northern Europe, where taxes are collected with ruthless efficiency (and often with scant regard for the most basic principles of the rule of law), Greek tax collection is random. Just making sure that the government actually received the taxes due would make much of the current crisis go away.

Probably Greek tax collection will improve somewhat, but it will still remain a far cry from the standards of Germany, Sweden, or Denmark. Without a reliable tax collection mechanism, any Greek budget forecasts are pure fantasy. This is a cultural problem far more than just a question of overspending. Even a convergence to the European average will take quite some time.

The Euro is the posterboy of the European Union ambitions. So when the usual choir of anti-Euro campaigners from the City of London and their allies in the mostly Conservative press began to discount the demise of the Euro, they again overlooked the sheer determination to keep it afloat.

The Euro was not created in order to solve largely hypothetical problems in the Intra-European trade flows. It was created as a part of the European ambition to create an economic unit strong enough to challenge the US when it comes to domination of the world markets, including the financial markets.

The charter of the European Central Bank may well be too narrow for stepping in and taking the lead in a critical situation. And the reliance of the majority of EU countries on Germany to shoulder the economic costs may well be exaggerated. But in the end, all stops will be pulled to make sure that the Euro survives. This political will to make the Euro work will put everything else aside.

Including the fact that the Euro currently is overvalued by quite a bit. We are likely to see something of a relief rally in the EUR. Europe would need the opposite in order not to end up having a much slower recovery than other regions. Engineering a weaker Euro is probably out of the reach of the ECB. So we could do with another glorious little budget crisis inside the Euro Zone.

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