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Update on the Greek tragedy

Finance Blogger: Anthony Harrington Anthony Harrington

One of the most insightful commentators on macroeconomic policy, Joseph Trevisani, chief market analyst for the foreign currency trading house FX Solutions, nailed the eurozone’s “Greek problem” in his latest commentary. At bottom, it is not about whether the Greeks have been too profligate (they have) or whether the Germans and French are being unrealistically hard-nosed (they are).

Rather, the real problem Europe has in holding together, as opposed to breaking apart catastrophically, is the absence of any formal mechanism for stopping national politicians from buying votes in the short term at the expense of disaster later. The constant temptation for politicians is to avoid austerity measures until their country is absolutely eyeball to eyeball with bankruptcy. Trevisani puts matters thus:

“The EMU experiment, one monetary policy and one interest rate, for sixteen capitals, with uncoordinated fiscal and tax policies and elected governments with very different financial traditions, that answer not to a federal authority but to their own voters, is wholly dependant on the prudence and financial good sense of the individual capitals. The EMU lacks any credible enforcement mechanisms for ensuring fiscal discipline from its members.

“The writers of the Maastricht Treaty thought that the unified currency would be self-enforcing. They expected that fiscal congruence would evolve from the requirements of the convergence criteria that set eligibility for euro membership and that had demanded a high standard of fiscal and deficit performance of the joining countries. That has not happened. The countries which had been used to borrowing and then devaluing to maintain competitiveness, Italy, Greece, Spain and Portugal, have remained as they were. The pact has not taught fiscal prudence.”

However, events subsequent to his commentary seem to give a hopeful indication that politicians and political parties can absorb harsh lessons, and possibly even take them on board in time to avoid the cliff edge their previous course was pointing them at. Under extreme pressure from Germany in particular, which would not have had a prayer of forcing similar austerity measures down the throats of its own voters, Greece has embarked on a stringent austerity package that will bring considerable pain to many ordinary Greek families.

Moreover, the markets have responded relatively well to the Greek government’s squaring up to its predicament. The €5bn 10-year government bond issue on March 3 was three times oversubscribed. Of course, in part that enthusiasm can be accounted for by pension funds and other long-term investors snapping up an interest rate of 6.25%, a massive premium for any government to have to pay in an era of low interest rates. On the plus side, of course, these investors wouldn’t be putting up money regardless of the interest on offer if they did not feel reasonably satisfied that the Greek government would be able to service the bond.

On the evening of issuing the bond, Greek officials were still expecting to be able to get financial support from Germany. However, once the Germans saw the depth of support for the Greek bond they, not unnaturally, told the Greeks to keep up the good work and to look to the markets for cash. That this is a bit po-faced should be self-evident. There is no way Greece can continue to pay that rate of interest on the further sums it is going to have to raise. Which brings us back to Professor Joseph Stiglitz’s point in my earlier blog post, namely that if the big two in the eurozone, Germany and France, would only stand behind Greece, the country would be able to get the cash it needed at rates it could afford to pay. The enthusiasm for the latest bond issuance proves that in spades.

But, and this is where political short-termism raises its head again, to do this, German and French politicians would have to run the risk of angering their own electorates, none of whom feel too happy about bailing out profligate Greeks out of their own pockets. The fact that they wouldn’t have to, provided Greece could keep on with its austerity measures (not exactly a given in the face of the strikes in Greece caused by the measures) is neither here nor there. French and German voters would feel on the hook for Greek debts and they wouldn’t wear it. Of course, they probably would not feel any happier about the euro vanishing and Europe returning to cross-border currency skirmishes, but that is still a distant prospect.

Further reading for Greek debt

Tags: EU , financial crisis , government bonds , Greece , sovereign debt
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