At the moment, it is open to debate whether the Greek default is a fairly inescapable outcome or an accomplished fact, but, clearly, getting the Greeks out of trouble is not the point for those who handle the situation.
What Brussels, which has recently approved a new 130b bailout for Athens absent the reasons to believe that the previous one did any good, worries about are the financial sector’s potential losses, not the problems confronting the Greek population.
Austerity packages are no cure for Greece but the bankers want their money back and have no desire to gamble on Greece’s ability to repay debts independently.
If a collapse is imminent, as the credit rating downgrade from CC to selective default slapped on Greece by S&P last February seems to suggest, the European bureaucracy and financial circles would rather keep the process manageable.
According to the estimates by the International Institute of Finance (IIF), a messy Greek default can drain about a trillion dollars from the EU budget.
Under a negative scenario, Ireland and Portugal will need the infusion of some $350b over the coming five years to keep their financial systems afloat. IFF projects that the necessary bank recapitalization will further absorb $160b.
It alarms watchers even more than the above that the socioeconomic climate is deteriorating rapidly not only in Greece but across the EU.
The last Brussels summit was supposed to end Europe’s indebtedness ordeal as 25 of the 27 EU members (all but Great Britain and the Czech Republic) subscribed to a fiscal pact capping the countries’ budget deficits.
The limit was set at 0.5% of the national GDP for countries with sovereign debts under 60% of the GDP and at 1% for those with heavier debt burdens, the sanctions for violations running as high as 0.1% of the GDP.
EU president Herman Van Rompuy struck an optimistic cord saying that “the turning point” had been reached and European Commission president José Manuel Barroso boldly announced that the EU was switching from crisis policies to those of economic growth, but neither explained how the growth would materialize with such restrictive conditions in place.
Spain, for example, must be half-way from where Greece currently stands considering that the 1% budget deficit requirement is no more realistic for the country than the demand that its people forever turn away from the traditional Corrida.
The European Commission wants Madrid to squeeze the Spanish budget deficit into the 4.4% bracket by 2012, but premier Mariano Rajoy speaks of 5.3-5.5% and stresses that the country actually needs stimuli, not cuts.
The problems are similar elsewhere in the EU, and Europe is divided over the austerity issue, with some calling for tight discipline and full compliance with the collectively endorsed obligations and others – for stimuli packages to revive growth.
It is unclear at the moment which of the two camps will prevail. The fiscal deal was signed under pressure from the powerful Paris-Berlin duo, but the late April – early May presidential poll in France is drawing closer and the front runner – socialist candidate Francois Hollande – is a vocal critic of the pact and of the spending cuts policy as a whole.
In the meantime, Europe is stuck in recession – a “mild” one, as European Economy Commissioner Olli Rehn chose to describe it on March 6. Fresh data from the European statistics agency indicates that the Eurozone and the EU outputs in the fourth quarter of 2011 fell 0.3% short of what had been posted in July-August.
Growth in the EU and the Eurozone measured only 1.5 and 1.4% in 2011, whilerecession spread over Belgium, the Netherlands, the Czech Republic, Italy, Portugal, Slovenia, and Greece. Considering that the recession pops up for the second time over the past three years, statements to the effect that the worst is over for the European economy cannot be taken seriously.
Negative trends are widely expected to continue throughout 2012, and some of the forecasts sound really grim. Belgian public enterprises minister Paul Magnette warns that the European Commission is steering a miscalculated economic course which can plunge Europe into 15 years of recession as welfare downscalings and other spending reductions automatically cause the economy to nosedive.
The alternative to the fiscal pact, as spelled out by Magnette, is that the EU should – via the European Central Bank and the European Investment Bank – help the countries battling the indebtedness crises repay their “historical” debts.
Europe’s business activity index which slipped from 50.4 points in January to 49.3 in February reflects the reality of ongoing recession and GDP contraction. Readings of over 50 on the market barometer are known to correspond to rising and of under 50 – to shrinking business activity.
The Wall Street Journal featured a forecast last February showing that the GDP of the 17 Eurozone countries would shed 0.3% in the first quarter of 2012 and roughly as much over the whole year, and that the integral GDP of the EU would sustain zero growth in 2012.
Last year, the projections were relatively optimistic, promising 0.5% and 0.6% GDP increases to the Eurozone and the EU. As of today, the European Commission has slashed the expectancies considerably for Italy, Spain, and Greece.
Italy and Spain will likely see their GDPs drop by 1.3% and 1% in 2012 instead of having them add 0.1% and 0.7% respectively. The Greek GDP originally seen to be on the way to a 2.8% fall will actually lose 4.3%. The current estimate for France is 0.4% growth vs. the 0.6% hoped for previously. The European Commission does have good news for Germany: the country will remain the Eurozone’s economic champion and, after fleetingly suffering a start-of-the-year dip, is headed for a 0.6% growth in 2012 based on convincing domestic demand and a stable labor market.
The European economic crisis is deep enough for its consequences to linger for decades, says US Treasury Secretary Timothy Geithner. He maintains that the IMF should join the European Central Bank in the European rescue mission, but that it would take giving the IMF resources a major boost.
Europe hypothetically needs around $600b to cope with its economic ills, and, reportedly, BRICs and Japan were ready to dish out most of the amount, but no dynamics is visible so far. If the BRICs countries are to pour money into the IMF, they would, in return, like to have the fund’s quotas redistributed in their favor, a move that would undermine the singular status of the US within the organization.
It should be noted in the context that China responds to the European developments in line with its usual strategy. Information surfaced this March that the country’s government additionally provided to the China Investment Corporation around $30b which will mostly land in the European countries hit worst by the crisis.
The traditional barriers in the way of the Chinese investments in the key sectors of the European economy are crumbling as the crisis rages on, and Beijing plans to fully take advantage of the situation and to massively buy into Europe’s high tech assets while outwardly assisting the IMF.
Vladimir NESTEROV, Strategic Culture Foundation