For Lucas Papademos, it had to be one of those “You’ve got to be kidding me” moments.
Or whatever the closest Greek translation is.
After weeks – no, months – of negotiating, haggling, bartering, bickering, brinkmanship and procrastination – the Greek Prime Minister and his partners in the coalition government finally agreed on a three billion euro austerity package last Sunday.
Even amid the mass rioting and looting that took place in Athens as a result, the cabinet must have felt a huge sense of relief. After all, it’s this package that will enable Greece to get its second bailout – one worth 130 billion euros – in order to avoid defaulting on its debt by March 20.
So imagine their reaction when they presented it to the so-called “troika” that had demanded the cuts (the European Union, International Monetary Fund and European Central Bank)… only to be told:
“Sorry, fellas… not good enough. Can you have a rummage down the back of the couch and find another 325 million euros? Oh, and by the way… we need you AND any future government to actually promise that you’ll implement the cuts.”
But you have to admit, the eurozone has a point…
The “Grexit” Strategy
Having taken so long to agree on the austerity package, it doesn’t exactly inspire confidence that the Greeks will actually rush to put its austerity into practice.
And with elections looming in April, it merely adds another layer of uncertainty.
The eurozone’s hardline stance illustrates two things:
- It leaves Greece with absolutely no wiggle room to mess around any further.
- It’s a test of Greece’s will and could be part of an ulterior motive to force Greece out of the eurozone – an increasingly popular sentiment.
Last week, I reported the view of European Commission Vice President, Neelie Kroes – that throwing Greece “overboard” wouldn’t be as disastrous now as it would have been at the peak of the financial crisis.
I wouldn’t be surprised if it’s an opinion that many politicians believe, yet hesitate to voice officially for fear of breaking the “party line.” But Luxembourg Finance Minister, Luc Frieden, joined Kroes this week. And not only did he suggest that it would be manageable, he took it a step further. Quoted in the Guardian:
“It might be something which would allow Greece also to at least, to some extent, get a new start. It would help Greece to create an economy that can create jobs.”
Would it? Well, the picture could hardly get worse for Greece. Its economy has now contracted for four straight years, including a 7% slump in 2011 and the unemployment rate has vaulted to around 20%.
Of course, this has all happened during Greece’s eurozone membership, so as its debt problems have escalated – and severely impacted the 17-nation bloc as a result – it’s easy to understand why the troika has imposed such harsh austerity demands.
I mean, what would it say to other troubled nations (stand up, Italy, Spain, Portugal, et al) if the eurozone went soft and simply kept bailing Greece out, even if it didn’t fulfill its cost-cutting obligations?
The downside is that such severe cuts squash Greece’s economy even further into the mire. And the by-product is that it may actually force Greece out of the eurozone entirely.
If this “Grexit” strategy is a covert goal for the eurozone, it then becomes a balancing act. But how – and when – would it happen?
Pick Your Poison
Well, your guess is as good as mine! However, there’s no doubt the eurozone is in much better shape now than it was when this crisis first hit.
According to the BBC, eurozone banks now have 80 billion euros worth of exposure to Greek institutions, compared with 200 billion euros in 2009. And as the ECB has proved, it’s prepared to flood the European financial system with cash if it needs to.
The crucial dilemma is this:
Does the eurozone continue to prop up Greece? Today, Germany’s finance minister, Wolfgang Schaeuble, likened the situation to pouring money down a “bottomless pit.” Hardly a viable solution.
Or does it take another risk by stepping into the unknown and trying to engineer a way for Greece to exit stage left from the region?
The truth is, nobody knows exactly what would happen with the latter scenario, or how serious the ramifications would be for the eurozone – especially with other countries struggling, too.
The fiasco continues…
Have a good President’s Day weekend,