Friday 26 December 2014

Brendan Keenan: Greek economic tragedy may inspire political union

Published 11/02/2010 | 05:00

EVER since the story of the Trojan horse, the world has been warned of the dangers of gifts from Greeks. This week, EU leaders are wrestling with the opposite problem -- the risks of bringing gifts to Greeks.

Not that it would be a gift, exactly. If other EU states -- especially the 15 in the euro area -- decide to assist the Greeks in their budget crisis, very unpleasant conditions will be attached.

As was clear from the streets of Athens yesterday, many Greeks regard such an idea as a Trojan horse for them. Government workers brought much of the public service to a standstill, including the airports. They aired a grievance with which we are all familiar: "We are not going to pay for their crisis."

The same not unreasonable complaint is heard in many countries, but their politics differ. The Greek government is headed by the Socialist Party which won its biggest ever mandate just last October, trouncing the previous centre-right government by capturing 44pc of the vote.

That puts Prime Minister Papandreou in a very difficult position to drive through the assault on public sector wages and pensions contained in the plan, even though Irish government workers may not regard it as that much of an assault.

It proposes a wage freeze, rather than cuts, on most earnings; the ending of bonus payments; and an increase in the average retirement age from 61-63 by 2015. However, many workers, especially in government, can retire after 25 years' service and may worry that this expensive perk is under threat.

But the government also hopes to raise €5bn in new taxes in a country notable for its dislike of paying tax. While Ireland has escaped the worst of this latest crisis, astute foreign analysts have noticed that it shares many of the less desirable characteristics of the group known as the "PIIGS" - Portugal, Ireland, Italy, Greece and Spain.

The main ones are an above-average resistance to taxation, and an above-average demand for public spending. Not surprisingly, all tend to have chronic problems with their budget deficits. What distinguishes Ireland is that it seems better able to deal with the periodic crises this combination creates -- first in the 1980s and now in the 2010s. One curious aspect of the Greek crisis is that it should make the Irish Government's task easier in the next two Budgets. The argument that the Government should ease up on its remaining €4bn correction, while it may have intellectual merit, is now clearly impractical.

It is still possible to differ on exactly how Brian Lenihan should go about things. But, given that the end result of all the budgets will merely hold public spending steady in cash terms, the Greek experience makes it virtually impossible to argue about the numbers.

EU leaders pondering what to do at their meeting today do not have the comfort of Irish cohesion. They must not only decide how to assist Greece in its financial difficulties, but devise a fallback position on what to do in the quite likely event that the Greek government cannot deliver. We won't be told what this is, but it had better be there.

Even the assistance idea presents huge difficulties. Should it be loans to Athens from other states -- which, in practice means mainly France and Germany? That costs their taxpayers real money. It would be deeply unpopular with the German "hausfrau" Chancellor Angela Merkel understands so well.

Should they guarantee the international banks and investment funds that Greek borrowings will be repaid? That would not require ready cash but it might be against EU law -- on the grounds that a loan is a commercial arrangement but a guarantee is a bailout.

The obvious answer is to call in the International Monetary Fund. This, after all, is the kind of thing they do. But there is huge resistance within the euro area to having outside intervention, even though it was acceptable elsewhere in the EU. And that raises the most fundamental questions of all.

Is the monetary union an entity which looks after itself? ECB president Jean-Claude Trichet has pointed out that the budget deficit of the whole eurozone is quite modest. But to make the markets see things that way -- never mind the 400 million citizens using the single currency -- the euro area would have to take on greater powers, and greater responsibilities, than it has at present.

That is what both critics of the euro, and its more fervent supporters, said from the beginning: that monetary union could not work without some form of political union. A Greek rescue may set such a process inevitably in train.

Strange, then, that there appear to be strong objections to an idea which would seem to meet many of these requirements.

This would be "euro bonds," where a certain amount of the borrowing of euro countries -- perhaps 40pc -- would not be done by their own governments, but in common by all 16. All of them would stand over repayment of those bonds, irrespective of which countries actually spent the money. With Germany behind them, the bonds should be sellable at a lower rate of interest than Greece, Ireland, or other peripheral states could manage.

But Germans would pay more. Probably not much more, but they face again the recurring dilemma between their own sound finances and low costs and the desire -- of their leaders at least -- for a more integrated Europe. How they choose over the next few months could well decide the future of that Europe.

Irish Independent

Promoted articles

Read More

Promoted articles

Don't Miss

Editor's Choice