Various political bodies such as the Euro Group will be meeting in Brussels today and tomorrow to discuss Greece. The talks will certainly also focus on the concrete form of possible support measures. The reaction on the markets to the EU’s announcement to stand by Greece has so far been disappointing. The financial markets would doubtless have wished to hear more specific statements on a possible rescue package last week. However, the question is increasingly arising to what extent current risk spreads adequately reflect the default likelihood of individual countries. This applies not only to Greece, but also to other southern European countries.
Guarantee declaration for Greece: Will the signal fall on deaf ears?
It is striking that, for some weeks now, the level of risk spreads has in some cases been hard to reconcile with economic fundamentals. It defies explanation that the cost of hedging against a default in a number of EMU countries is currently higher than, for example, for Romania or Russia. A lack of differentiation is presently also evident in the fact that a possible sovereign default is also being projected onto a number of other EMU countries. The public finances of countries such as Portugal, Ireland, Spain or Italy are at present not exactly in good shape, but by no means as bad as in Greece. For instance, it is being overlooked that, compared with Germany, the interest burden (in relation to gross domestic product) in Spain and Ireland is substantially lower and in Portugal more or less on a par. Moreover, the fiscal difficulties in the euro area are by no means larger than in, say, the USA or the UK.
It was correct to combat the worst economic crisis for decades with high public-sector demand in the years 2009 and 2010. That is compatible with the European rulebook. There was also broad consensus that public-sector consolidation should start in 2011. It is a major task, but can be done. However, it is not enough simply to slam on the cost brakes, it will require a medium-term policy geared to structural reforms, aimed at fostering growth drivers. In this sense, the crisis must be seized as an opportunity. In addition, it should have convinced the last doubting Tom that the provisions against fiscal delinquency need to be improved. The euro area must remain a zone of fiscal stability. We do not need a fund to tackle crises or to rescue countries once they have overindebted themselves, rather we need more prevention, more effective precautions to ensure that such developments are avoided in future. The Stability Pact must be enhanced by including, for example, spending/revenue rules and by tightening sanctions on miscreants.
Within such a framework, a one-off European assistance program for Greece would make sense as a last resort. As it will have to involve structural reforms and strict budgetary discipline, it would do no harm to engage the pertinent experience of the International Monetary Fund.
However, the fruits of such a policy do not ripen overnight. The markets are therefore likely to remain jittery about the state of public finances. Such concerns will not be confined to the EMU countries. Anglo-Saxon countries will also see interest rates for government loans rise. This, and not Greece alone, is the real risk inherent in the current situation.
Dr. Michael Heise
Tel.: 49 / 89 / 38 00-16143
e-mail: [email protected]