The euro-zone crisis continues a trajectory whose outcome is still fraught with risk and uncertainty. Although it initially attracted some favourable comment, the latest (July 21) bailout of Greece may not be enough over the longer haul. This latest support is in two parts. First, an extra E109 billion in official lending from other euro-zone countries (excluding Ireland and Portugal) and the IMF. Europe has also agreed to cut the interest rate it charges Greece from 5.5% to around 3.5% (the same kind of rates enjoyed by Germany, the strongest economy in the euro-zone). Second, asking Greece’s private creditors to assume some of the rescue burden.
The political philosophy (led by Germany) of this rescue plan appears to be a ‘controlled process of successive, agreed steps’ towards resolving the core problem (excessive debt) with some of the euro-zone countries. This became clearer in statements by Chancellor Angela Merkel following (on July 22) the euro-zone crisis summit on July 21. The plan was enough to calm (temporarily at least) the markets, but not bold enough to provoke euro-zone taxpayers on the continuing scale of subsidies to European countries.
An interesting aspect of this rescue is the apparent different political and electoral views on it within the two major euro-zone economies, Germany and France. Whilst the Germans (and other creditor countries, like the Netherlands and Finalnd) are critical of ever more support to Southern Europeans, the French do not appear to mind at all. So far, France has contributed roughly the same amount (around Eur 16 billion) as the Germans to the bailout of Greece.
There may be many reasons why the French are more relaxed than the Germans. For example, there is certainly a strong commitment to the euro in France and saving Greece has become bound up politically and emotionally with saving the euro…..and even the wider Europe. Another, more pragmatic reason may be that French banks have a greater exposure to peripheral country bonds and so they are more predisposed to support efforts to help protect their creditworthiness.
The euro-zone crisis has now stumbled from one rescue plan to another for over a year. Greece, followed by Ireland, then Portugal, followed by Greece again have successively been in the news. Each time the reaction has not always been swift and the eventual plan a kind of ‘stop gap’. There does not appear yet to be the political will to accept the reality of the need for major debt reduction in some apparently insolvent euro-zone countries. At the same time, the banks affected by these needed moves (those banks with corresponding exposures to these country debts) would need to be re-capitalised and ‘fire-walled’ in some way from the rest of the banking sector. So far, the political will and impetus are not apparently there to take these more fundamental and serious steps.
But whilst politicians debate and procrastinate, events continue to unfold along the present euro-zone trajectory. In early August, the spotlight began to turn and encompass Spain and Italy. France is also now beginning to attract attention. At the other end of the size spectrum, Cyprus is apparently close to a bailout.
Like the US debt-ceiling debacle, the euro-zone crisis is also a political as well as economic problem. Whilst politicians dither and attempt to score points, market uncertainty increases. Unless this process is reversed, market sentiment may increasingly dominate. The recent ‘credit crunch’ showed us how markets can behave when uncertainty assumes centre stage.
Professor Bullion
