Greece: one more step towards stabilityPosted: 21/02/2012
By Alexander Nicoll, Director of Editorial
Step by step, the eurozone debt crisis is being dealt with. During the market hysteria of the second half of 2011, the very survival of the euro as a common currency seemed to be in doubt. That is not being questioned today. The €130bn bailout deal reached in all-night talks by Greece, its fellow eurozone members, the International Monetary Fund and private creditors is one more step towards stability.
For months, it seemed that governments were fumbling in the face of the crisis that was engulfing them. If Italy and Spain had been forced to join Greece, Ireland and Portugal in needing rescue finance, then the consequences for the euro and Europe would have been severe. But, as the IISS wrote in a recent Strategic Comment, a combination of measures has eased the tensions: changes of government in Greece, Italy and Spain; a ‘fiscal compact’ agreed by 25 European Union members, holding the promise of greater harmony in economic policies; and the European Central Bank’s injection of unlimited three-year finance into the banking system.
The Greek deal will mean, in effect, losses of 75% for private bondholders. Some are describing these as ‘not a haircut, but a scalping’. Nevertheless, those losses should by now have been almost all accounted for. It averts the one thing that threatened to spread contagion and uncertainty: a disorderly default and possible exit from the euro. For Greece, the terms will be very challenging as well as unpopular. So it must be questionable – and has been questioned – whether they can be achieved. Even in 2020, Greece’s debt is projected to be 120% of GDP, and this can only be reduced if its economy recovers faster than expected. Perhaps it will, or perhaps in time the terms will again have to be revisited. But time has again been won.
Important issues have still to be addressed. The eurozone will probably agree on larger ‘firewalls’ to prevent every debt problem from turning into a systemic crisis. In spite of the ‘fiscal compact’, governments must grapple with the issue of how a common currency area can cope with differing levels of competitiveness: Greece will never be like Germany. And the eurozone must be able to confront economic and financial problems without overtones of prejudice and hostility that have entered the political debate. That requires a stronger hand from EU institutions; indeed, the terms of the bail-out deal include a permanent team of monitors in Greece. But for now at least the order that has returned to the markets since December should endure.
See more from Alexander Nicoll on this subject in Fiscal Union by Force in Survival: Global Politics and Strategy.