As I noted here the Eurozone countries will not allow one of its own to go into default - the project is far too important to allow Greece to default. With Greece facing bankruptcy and despite questions over the legality of such a move, Charlemagne's notebook confirms that it’s now a question of how not if:
As expected, it looks as though the EU will bailout Greece and impose very strict IMF-like conditions as a result - forcing a reluctant Greece to deal with its deficit.
IN Brussels policy circles, the question asked about a bailout of Greece used to be: are European Union governments willing to do this? Now, I can report, the question among top EU officials has changed to: how do we do this?
Twice in the past 48 hours I have heard very senior figures—both speaking on deep background—ponder the political mechanics of how large sums in external aid could be delivered to Greece before it defaults on its debts: a crisis that would have nasty knock-on effects for the 16 countries that share the single currency.
One figure said yesterday that heads of government could not wait "forever" to take decision. That means a decision in the next few months, at most. Greece's draft plans for reducing its deficit from around 13% to 3% in three years did not seem credible, said this source. Thus a crisis loomed. "We need to help them," he said. This means "external aid" of some sort, in exchange for strict conditions.
There are a couple of dangers here. Firstly, the strict conditions could be political disastrous in Greece, something the Greek government is already acutely aware of - a backlash against membership of the EU could result on the streets. Secondly the political consequences around the rest of the EU could be grim as well.
As a result of the ratification of the Lisbon Treaty under Article 122 all the 27 member states of the EU, not just the 16 member states of the Eurozone, are obliged to help the Greeks if the EU decides to bail them out. Article 122 states:
This decision is taken on a majority vote, consequently meaning that the UK, which is not part of the Eurozone, would be forced to help save the euro. If the EU decides that member states have to contribute in accordance with their own share of the total EU economy, Britain might be forced to pay a £7 billion bill to bail out Greece – or perhaps even more, if other bankrupt Eurozone countries, such as Spain, are excused their share.
“Where a member state is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the council of ministers, on a proposal from the European Commission, may grant, under certain conditions, Union financial assistance.”
The bill could be even higher if other debt-ridden countries such as Spain and Portugual, seeing the Greece bailout, claim the same treatment. This could saddle Britain with a bill of £50 billion to save a currency in which the UK has never been a part of. Political dynamite, and not just in the UK as I noted here such a move would also be deeply unpopular in Germany.
There are other problems; no-one knows the true scale of the Greek debt - it's very likely to be much higher, the EU still lacks clear mechanisms to handle a situation like the present crisis, it is stuck on debate regarding the legality, and there is clearly a split in opinion between countries more positive in helping Greece and others that are deeply uneasy.
One obvious solution would be to order Greece to go to the IMF. The IMF have already indicated their readiness to help, they not only have the necessary tools but would take the hit for the unpopular measures needed.
The reluctance to bring in the IMF is, of course, political - to do so would be humiliating for the Eurozone, but also Charlemagne's notebook points to another reason for the reluctance:
This brings me back to an interesting detail about the IMF. It is often said that the IMF cannot intervene within the euro zone because it would be too humiliating, politically, for the EU to admit it could not look after one of its core members. That is clearly a view shared by senior officials. However, one source offered a further reason why the IMF is not welcome that I had not heard before. The fund's experts typically offer countries in trouble a mixture of fiscal and monetary advice, he explained: ie, they tell countries to cut public spending and raise taxes, but also to alter interest rates and take steps to stabilise their currency. If the IMF told Greece to cut public sector salaries, say, that would not shock the rest of the EU, he said. But what if the IMF demands that Greece tighten or loosen its monetary policy? Greece shares its monetary policy with the other 15 members of the euro zone: would the ECB be expected to change its monetary policies? And what would Germany have to say about that?
Political considerations are being placed above financial ones but as the EU is about to find out, you can't buck the market. The day of reckoning is approaching fast, though Jose Luis Zapatero, Spain's premier appears confident:
"Nobody is going to leave the euro"The political will may be there, but markets move much faster. The problem is not just Greece but Spain, Portugal and Italy - the prospect of contagion is very real as the markets find the next weak link. The EU leaders could very well soon find themselves surrounded by the wreckage of a European currency before they know what the hell has happened.
Update: This chap can't be accused of mincing his words regarding the crisis in the Eurozone:
hattip: thedarknight comment on The Tap blog