Under Threat of Greek Default

BRUSSELS, BELGIUM—The specter of Greek default haunted Monday’s informal European Union summit. Despite valiant efforts by EU leaders to focus on promoting growth and jobs, an issue they finally seem to have woken up to, and on finalizing the new fiscal compact agreed on last December, Greece’s debt odyssey hovered menacingly over the proceedings. And, as if the Greek situation were not enough, nerves were further frayed by the evolving Portuguese disaster. As talks were under way in Brussels, ten-year Portuguese bond spreads were reaching euro-era highs of more than 15 percent amid growing fears that the Iberian country would follow in Greece’s footsteps and restructure its debt.

The most significant development coming out of the summit was the agreement on the specific terms of the new fiscal compact, which aims to enforce greater budgetary discipline among signatory countries. But the Czech Republic opted out of the new pact during the negotiating process, citing nebulous constitutional reasons. Previously, the United Kingdom had elected not to participate.

The fiscal compact commits its 25 remaining members to balanced budgets. More specifically, it commits them to structural budget deficits no larger than 0.5 percent of gross domestic product in the medium term, preferably through amendments to individual countries’ constitutions, but allowing also for measures “otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes.” Constitutional amendments to members or the pact were not mandated as a way to bypass a referendum in Ireland and arduous processes in Denmark, Finland, and Greece, all of which require the approval of two consecutive parliaments to ratify changes in their national constitutions. For the fiscally virtuous, countries with a debt-to-GDP ratio “significantly below” 60 percent, deficits are allowed to go up to 1 percent. In countries on track to miss these targets, a “correction mechanism” will automatically go into effect to achieve the necessary fiscal retrenchment. In addition, countries with a debt-to-GDP ratio that exceeds 60 percent must annually reduce it by one-twentieth until it reaches that number.

This being the EU, much remains messy and unresolved. In particular, the British and Czech opt-outs have created a serious legal problem with the participation of the European Commission and European Court of Justice in the implementation process (as EU institutions, they cannot act in the context of an agreement that is not an EU treaty). This complicates the process of identifying and sanctioning the fiscally undisciplined: If this were an EU treaty, the Commission would appeal to the European Court of Justice, and it would render its verdict. As things stand, the only way to implement the compact is for one country to appeal to the Court against another. The potential for bitter feuding should be obvious to all. Indeed, Francois Hollande, the Socialist candidate for the French presidency who is leading in the polls, has said that he wants to renegotiate the compact, and the current French president, Nicolas Sarkozy, said on Monday that he would push for its ratification before the French election. At her press conference, German Chancellor Angela Merkel was asked whether she thought it likely that Berlin would take Paris to the Court of Justice (she didn’t).

The other major topic on the agenda Monday was the looming double-dip recession and the growing unemployment crisis in the eurozone and the EU as a whole. On Tuesday, as if to highlight the need for immediate action, Eurostat revealed that the level of unemployment in the eurozone’s 17 countries reached 10.4 percent in December—the highest level since the euro was introduced. The champions in this index of misery are Spain, where the general unemployment rate has reached 22.9 percent and the unemployment rate for people under age 25 has reached a staggering 48.7 percent; and Greece, with unemployment at 19.2 percent and rising to 47.2 percent among the young. In total, 23.8 million people are jobless in the whole of the EU.

Sadly, there is little hope that the proposals agreed to on Monday—the redirection of EU development funds to support youth employment, steps to further open up the internal market and to enhance cross-border labor mobility, the facilitation of credit provision for small and medium-sized firms—will make much of a dent in unemployment. Given that Germany, the eurozone’s most powerful member, is enjoying its lowest rate of joblessness (6.7 percent) since reunification, the urgency is not there for a serious assault on the sources of continent-wide economic stagnation. Only if things start going downhill in Germany will the fiscal compact be interpreted with sufficient laxity to allow countries to engage in stimulus policies.  

By 10:30 Monday night, all the EU members had completed their press conferences and were being driven to their hotels through the snow-packed streets of a Belgian capital just emerging from an anti-austerity general strike. All but one. Greek Prime Minister Lucas Papademos held talks long past midnight with top EU and European Central Bank officials to discuss the progress made on the negotiations for his country to receive 130 billion euros in new bailout money. As Papademos told journalists in the early hours of the morning, Greece’s European partners demanded an “irrevocable commitment” from the three parties currently supporting Greece’s coalition government to implement what is agreed no matter who comes out on top in the country’s upcoming election (tentatively planned for April). They also pushed for the deals, both on the debt and on the new wave of austerity, to be completed by this Friday. The hour of decision seems finally to be at hand.

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