Can Europe rescue its single currency?
As finance ministers prepare for crisis talks on Greece, Brian Brady and Mark Leftly look at their positions
Sunday 19 June 2011
Q&A What the Greek bailout means for the euro
So the euro's in crisis. Wasn't a single currency supposed to end all this instability?
It's hard to remember, when the eurozone is mired in crisis, why 12 European Union states ditched their own currencies and pitched themselves into the single-currency project in the first place. But they were convinced that the euro would cut costs for banking and business and encourage more cross-border trade – within Europe and with the rest of the world. And it wasn't just that they were blinded by the financial rewards: politically, it was also hoped that the single currency would promote stability by improving relations between member states – and allow the European Union to challenge US supremacy more effectively.
But didn't anyone warn us from the start that this could happen?
Not many – and if they did they were drowned out by the celebrations. The euro was not just a bunch of pretty new notes and coins to spend in the shops; it was heralded as a historic project – at least in the countries that adopted it on 1 January 2002. On the day the currency was introduced, the then German Chancellor, Gerhard Schröder, told his people that: "We are witnessing the dawn of an age that the people of Europe have dreamed of for centuries: borderless travel and payment in a common currency." But prominent Europhiles could not disguise their ambition for the change to go further: the notorious (in the UK, at least) former European Commission president, Jacques Delors, said the eurozone needed "a leader for political matters and not just monetary ones". Sceptical economists – particularly in the US – issued grim warnings, highlighting southern European countries such as Greece as major concerns. Martin Feldstein, professor of economics at Harvard, went the whole hog and said the euro could "reinforce longstanding animosities based on history, nationality and religion" and lead to open conflict.
Why did Britain stay on the sidelines?
The most familiar argument against joining was the fear that losing control over the national currency would fatally undermine Britain's sovereignty – and that was before the political union that all the Eurosceptics warned was further down the line. The Commons Speaker, John Bercow, then a right-leaning Tory backbencher, warned that "the single currency is the greatest abandonment of national sovereignty since the foundation of the European Community". The division was reflected at the top of the Labour government, where the Europhile Tony Blair allowed his sceptical Chancellor, Gordon Brown, to delay entry by devising five economic tests that must be met before Britain could hold a referendum on abandoning the pound. Joining in 2002 was too risky politically; yet, the then-PM insisted that Britain should not stay out of the euro for "political reasons", as to do so "would be a betrayal of our national interests".
But it was doing OK for years – how could it go so badly wrong now?
It is difficult to defend the crisis-hit governments, and European leaders were quick to point the finger – particularly at the Greeks. Lorenzo Bini Smaghi, a senior figure at the European Central Bank, said Athens "hadn't really pursued sound fiscal policies". But he also warned that member states had been wrong to trust markets and EU-wide regulations – for example on debts and competitiveness – to avert any crisis. The EU president, Herman Van Rompuy, claimed the single currency's success over several years had blinded the eurozone to the problems in parts of the EU.
Why did Greece get into this mess?
It's hard to imagine how any country could have such huge debts: it is expected to owe 160 per cent of its gross domestic product by later this year. The debt is a result of its huge public sector, hence the need for the type of austerity measures that have hit workers hard and have led to riots on the streets of Athens. As the world's financial system collapsed, so it became too expensive for Greece to borrow the money it needed. In short, Athens owes left, right and centre.
We've bailed them out once – why didn't they get it right after that?
Last May, the International Monetary Fund and the EU agreed to bail out Greece to the tune of €110bn (£97bn). The IMF is expected to forward the latest slab of ¤12bn, despite targets agreed as part of the bailout being missed. However, this will only plug minor leaks in a sinking ship: there is a culture of tax avoidance and a woefully outdated collection system unable to cope with catching up with the culprits. Unemployment has remained high, arguably the fault of the spending cuts demanded by the IMF and EU. Also, rioting has marred attempts to restructure the economy.
It sounds as if they're a basket case. How can Greece get out of this mess?
There are three real options, ranging from hopeful to humiliating. The government can keep raising taxes in the belief that a radical overhaul of its collection system works; it can renegotiate the loan terms; or it can default on its repayments. Today, EU finance ministers are expected to agree in principle the conditions of a second bailout, with some commentators believing that up to €100bn is needed to keep Greece afloat. However, it is widely believed that Greece will eventually default on repayments, which include those on loans from some of Europe's biggest banks.
And would that mean the end of Greece in the eurozone – or disaster for the euro itself?
Euro membership has not helped the Greeks sort out their crisis. The government's monetary options, such as altering interest rates, are limited as a result of being part of a single currency. Fears are growing that the only way for Greece to sort out its credit disasters is to exit the euro and return to a heavily devalued drachma. This would put a huge question mark over the stability of the euro and could set a precedent where leaving the currency is deemed acceptable in extreme circumstances. Also, European banks that have lent heavily to Greece would make vast losses from an exit.
And what about us – will a default cause any problems for the UK?
The UK may not be in the euro, but be in no doubt that the continent is far and away this country's most important trading partner. As it is, the UK, behind France and Germany, provides the third-highest amount of bank and private lending to Greece. If the crisis spreads to the other economies that have struggled so badly in the financial crisis – Portugal, Ireland and Spain – then it will hurt the UK. Britain is particularly exposed to the Spanish and Irish property markets, which have already been brought to their knees. Any further collapse could expose British banks to some of the worst effects of the crisis.
We've already done our bit to help Greece out; will David Cameron really go along with another rescue plan?
The PM attempted to prove himself a good European by taking an active role in the first Greek bailout – and the support for Ireland and Portugal. But, with the burden on UK taxpayers already over £12bn, this one might be a step too far. The Chancellor, George Osborne, claims the second Greek bailout should be the responsibility of eurozone members, although Germany would like some of the cash to come from the EU's emergency fund, the European Financial Stabilisation Mechanism (EFSM). The problem is, an agreement signed by the former Labour chancellor, Alistair Darling, would then require Britain to pay 12 per cent of any loan guarantees. Many in the Conservative Party – particularly the Eurosceptic rump – were critical of the original bailouts, given that they were made at a time of unprecedented financial restraint, and the dissent is getting louder. Mr Osborne will be attending the Greece bailout talks in Luxembourg next week, but he has made it clear that he expects Germany and France to stick to their public acknowledgement that the issue does not involve the UK. Politics could just demand that he offers a token amount – although not the whole 12 per cent – to avoid being isolated.
German Chancellor, Angela Merkel
Considered the linchpin of the rescue plan, as the leader of Europe's richest nation – and probably the most exposed to Greece's debts. She has warned that private finance must take a hit as part of the rescue plan, but the scale of the crisis in Greece is bringing her round to the idea of a bigger state input.
"We will do everything to maintain the euro and its stability as a whole."
International Monetary Fund, Acting managing director, John Lipsky
The former IMF head, Dominique Strauss-Kahn, was a fixer who was attempting to negotiate a settlement to the Greek crisis; his US replacement prefers to bang heads. He warns the IMF loan to Greece must be underwritten by Germany.
"The essential challenge in Greece is to improve the underlying competitiveness of that economy."
French President, Nicolas Sarkozy
Concerned about France's vulnerable position – French and German banks hold 55 per cent of Europe's total exposure to Greek debt. Hopes that Merkel will support a Europe-wide, state-sponsored rescue.
"France and Germany want a new programme in place as soon as possible. There is no time to lose."
Greek Prime Minister, George Papandreou
Struggling to form a coalition while quelling a revolt in his own party, amid rioting over his austerity measures. Has just reshuffled his cabinet in an attempt to restore confidence in his government and in the hope of providing the stability demanded by EU colleagues.
"We will prevail and we will hold on. We have as a country in the past successfully faced major crises. As hard as this struggle is, we cannot run away from our fight."
European Central Bank President Jean-Claude Trichet: Hardliner at odds with EU leaders.
"Persistent losses in competitiveness on the part of individual members ... lead to a build-up of external and internal imbalances. They can also have spillover effects on others."
European Commission President Jose Manuel Barroso
The most powerful man in the EU, who faces personal disaster if the eurozone disintegrates.
"Greece must do its part. I am confident leaders in Greece and Europe will rise to the challenge and act with responsibility."
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