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Beware of Greeks seeking gifts

The euro zone is in crisis. It seems that not only does Greece have the largest budget deficit in the EU in proportion to the size of its economy, but previous Greek governments have been ‘economical with the truth’ when presenting official statistics. The Greek budget deficit is around 13% of GDP, and the country has agreed to reduce this by four percentage points next year and bring it down to 3% by 2012.

In fact, the original Maastricht rules require member government’s budget deficits to be limited to 3% of GDP and national debt to be no more than 60% of GDP. However, all this was agreed before the biggest worldwide recession since the 1930s. The current problem is that Greece has to borrow large amounts of money to finance its debts at the same time as it is putting an austerity programme into place. Given that the reliability of Greek debt has been severely downgraded in the market, this means that they can only borrow at very high interest rates.

On top of this, if the EU does not come to their aid and the country defaults on its debts, the contagion will spread to the rest of the ‘PIGS’, as they have been dubbed. That is Portugal, Ireland and Spain as well as Greece.

How did the PIGS get into the mess they are currently in? Basically these countries went full throttle in recent years sustaining a boom based on credit, itself based on the low interest rates set by the European Central Bank. This fuelled large increases in wages in these countries at a time when there were low levels of inflation recorded in France and Germany. These high wages are also now damaging these countries’ export potential. There has been, therefore, a lack of balance in the economies of eurozone members. The subsequent ‘crash’ has now brought the chickens home to roost.

Why should the other EU members help out Greece? Well, actually Greece hasn’t asked for any help. Technically it would be illegal under EU rules for Germany or France to dip their hand into their pockets to bail out another country. This is why yesterday the EU’s Heads of Government promised that states within the eurozone will take “coordinated action, if needed, to safeguard financial stability in the euro area as a whole.” At the same time pointing out that: “The Greek government has not requested any financial support.”

So, far all they have given is a promise but when the Finance Ministers meet next week, more substance may be added to it. Already, there has been strong reaction in Germany. The Bild newspaper carried the headline yesterday: “No money for the bankrupt Greeks.” Other commentators were calling for the Mark to be brought back to replace the euro. The Germans are particularly concerned given that the latest figures show that the German economy showed zero growth in the last quarter of 2009, following a growth of 0.7% in the previous quarter.

Given their current economic situation the Germans will not be happy contributing to a bailout. On the other hand, could this crisis result in the break up of the eurozone. Experience tends to suggest that the two things the EU is good at are talking and compromising. Something will doubtless be worked out. One good thing is that with the UK being outside the eurozone, we will probably not be involved in any bailout.

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Posted in European Union, eurozone

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