Angela Merkel has been saying that the single currency is “the glue that holds Europe together” and “If the euro fails, then Europe fails.” The Euro has failed! The eurozone should accept once and for all that the Euro and the common monetary policy do not work.
The Greek debt crisis has thrown the eurozone into the most serious crisis of its history. On 23 April 2010, Greece made a formal request for emergency financial aid from the eurozone and IMF. Then, on 2 May 2010, the Euro area finance ministers unanimously agreed to activate the financial aid to Greece through bilateral loans, which are pooled by the European Commission. They agreed a three year joint lending programme aimed at avoid a sovereign default by Greece, and prevent the crisis from spreading to other eurozone countries. The financial aid facility to Greece (€110 billion) has been funded jointly by the eurozone Member States (€80 billion) and the IMF (€30bn). Those who doubted that would be enough to save Greece from default have been proved right. The eurozone countries contribute to the support mechanism according to their proportion of capital in the European Central Bank. Portugal and Ireland, which could not afford, in fact they are now being bailed out, have contributed to the Greek bailout, increasing, in this way, their public debt.
In order to see the financial aid activated, Greece has adopted and committed to implement a programme of austerity measures. The Council adopted a decision, under Articles 126 and 136 TFEU, aimed at strengthening budgetary surveillance and asking Greece to take measures to reduce its government deficit. However, none of these provisions could have been used as a legal basis to the financial aid package. The financial aid to Greece is, therefore, based on an intergovernmental agreement. Nevertheless, it ignored the “no bailout clause”, provided in Article 125 TFEU. The Treaty forbids Member States for being liable for the debts of another. The Member States are providing loans and not grants, however it is now clear that they are becoming directly liable for Greece’s debt obligations.
The Maastricht rules were introduced to avoid situations as the present one whereas eurozone Member States have been disregarding the Stability and Growth Pact (SGP) rules, running large debts and deficits, threatening to default, weakening the euro, and now the other Euro-area members will pay for their debt. Hence, the EMU pillars have failed, the SGP does not work and the bail out clause has been breached.
Before the introduction of the euro there was no risk of a Member State fiscal deficits spill across the other Member States, but that is no longer the case. In May 2010, the eurozone leaders alarmed by the possibility of the euro being at danger issued a statement aimed at ensuring financial markets that the Greek debt crisis would not spread to other Member States. The eurozone leaders were desperate “to ensure the stability, unity and integrity of the euro area.” Hence, in order to respond to escalating concerns on financial markets, they agreed to establish a European stabilization mechanism to prevent the Greek debt crisis from spreading to other countries. The EU emergency mechanisms have failed, the Greek debt crisis has spread to other eurozone countries.
The Council adopted a regulation establishing a European Financial Stabilisation Mechanism based on Article 122 (2). The “difficulties caused by national disasters or exceptional occurrences beyond” a Member State control, foreseen in the provision, have been broadly interpreted to be also caused “by a serious deterioration in the international economic and financial environment.” However, the Greek, the Irish, and the Portuguese crisis have not been caused by “…exceptional occurrences beyond [their] control …”. Brussels went beyond the powers conferred by the treaties to provide a legal basis for the emergency funding. The European Financial Stabilisation Mechanism (EFSM) breaches, therefore, the “no bailout” clause, that forbids Member States for being liable for the debts of another. It is also a misuse of Article 122 (2), which is meant for national disasters. The Commission is allowed, thought the facility created by Article 122.2, to raise up to €60 billion in funds on international markets, on behalf of the European Union, using the EU’s annual budget as collateral, to provide EU loans to Member States facing financial difficulties. Hence, if a beneficiary country fails to pay back the loan, all 27 EU Member States are jointly liable for any payments due and would have to pay into the EU budget to cover the default.
Then, fearing that this financial mechanism would not be enough, the eurozone Member States created a temporary instrument, the European Financial Stability Facility (EFSF), worth €440 billion, to provide financial support to eurozone countries having difficulties refinancing their debts. The EFSF sells bonds and other debt instruments on the open market, which are secured against guarantees from eurozone states. Presently, in order to maintain its AAA credit rating only €250bn of the EFSF can be used as loans as the rest of the money has to be kept in a cash reserve. The EFSF is not based on a Treaty provision but on an intergovernmental agreement. It is important to note that the Member States, which take part in the EFSF, guarantee funds raised by the EFSF from third parties, but not those provided by the EFSF to the Member States. They are not directly assuming the liabilities of other eurozone Member States but they are exposing themselves to significant losses.
The euro debt crisis has not ended with Greece, in fact it had just started. The Greek debit crisis has spread to other eurozone countries. Yet, one year ago, we have been told that the creation of the EFSF and the ESM would prevent that from happening. Ireland had been subject to pressure from European Institutions and Member States into accepting a rescue package in order to stop “contagion” to other eurozone Member States, particularly Portugal and Spain. Then, last November, Ireland became the second eurozone Member State to be bailed out (EUR 85 billion package). And now, Portugal becomes the third euro-zone country to be bailed out, and there is no guarantee it would be the last. As Dan Hannan MEP said “Greece, Ireland and Portugal have not been rescued: they have been sacrificed to save the euro.”
Portugal’s government fell just one day ahead of the European Council meeting last March. All the opposition parties rejected the package of austerity measures proposed by the minority Government and as expected, J0se Socrates announced his resignation. The Portuguese President, Cavaco Silva, has called an early election on 5 June. The political crisis has further increased the cost of Portugal’s borrowing, and José Sócrates, who has been saying that Portugal did not need external financial aid and on 7 April, made a formal request for the activation of the EU financial support mechanisms. This is not the first time that Portugal required external financial aid, but in the 1980s Portugal was able to devalue whereas nowadays it is in the eurozone straitjacket. In fact, since Portugal joined the euro, the economy has not grown.
One could say that it was against the national interest to ask for EU financial aid. By accepting the bailout Portugal has lost sovereignty over economic and financial policy. Moreover, the financial aid programme is very unlikely to work. The bailout won’t help Portugal, as it has not improved the Greek or the Irish situation. According to Jonathan Loynes, chief European economist at Capital Economics, “While the confirmation of the bailout should provide some reassurance that Portugal will be able to meet its upcoming bond redemptions, it won’t put an end to speculation that - along with Greece and perhaps others - it will sooner or later need to undertake some form of debt restructuring (…)” Hence, one could come to the conclusion that it would have been better for Portugal to restructure its debt now. However, Mr Socrates said that if Portugal had decided to restructure its debt now that would have put at stake the European project and the euro. On the other hand, the eurozone leaders were against it. The interest rates demanded by the EU are too high. It would be very difficult for Portugal to pay its increasing debt. Angela Merkel has already shown her opposition to the possibility of a eurozone Member State restructure its debt, before 2013. Ms Merkel said “It would raise incredible doubts about our credibility if we simply were to change the rules in the middle of the first programme.”
The EU leaders agreed to amend the Treaty in order to allow the creation of a permanent crisis mechanism by the Member States of the euro area. The permanent European Stability Mechanism (ESM) will replace the European Financial Stability Facility (worth €440bn) and the European Financial Stabilisation Mechanism (worth €60 billion) in 2013. According to a “Term Sheet on the ESM” recently agreed, the participation of private sector creditors on any future eurozone bailout would be decided on “a case by case” basis. If a Member State has a liquidity problem, ESM support will be subject to an “adjustment programme and private creditors will be encouraged to maintain their exposure,” If a country is considered to be insolvent, on the basis of a sustainability analysis made by the Commission, the IMF and the ECB, that country would have to “engage in active negotiations in good faith with its creditors to secure their direct involvement in restoring debt sustainability.” Then, “The granting of the financial assistance will be contingent on the Member State having a credible plan and demonstrating sufficient commitment to ensure adequate and proportionate private sector involvement.” Private creditors would participate in future eurozone debt restructuring by collective action clauses annexed to eurozone government bonds issued after 2013.
Obviously, EU financial support to Portugal can only be provided under a strict conditionality programme. The terms of the financial rescue package have been negotiated between “troika” (officials from the European Commission, the European Central Bank and International Monetary Fund) and the Portuguese caretaker government. They reached an agreement on a financial rescue package, over three years, worth €78 billion from the EU and IMF. Portugal’s main political parties have supported it. Portugal has to repay €4.9 billion by June 15 and it was therefore under pressure to reach an agreement on the rescue package, before the 5 June general election, in order to avoid default. The Eurogroup and ECOFIN Ministers’ “welcomed the support expressed by opposition parties and call on all political parties to ensure a rigorous and swift implementation of the programme.” The future government would be bound by the memorandum of understanding terms. The Commission has said “It’s not their programme any more. It’s ours,”. In fact, Jürgen Kröger, Head of European Commission Mission has stressed, “In the present election campaign, it should be clear that the next government has to take responsibility for the programme and implement the measures.” So much for democracy.
It is important to recall that under the Regulation establishing the European Financial Stabilisation Mechanism, the Council, on the basis of a qualified majority vote, following a proposal from the Commission, adopts a decision granting EU financial assistance. In order to release funds from the eurozone-only European financial stability facility, a unanimous decision by the eurozone Member States is required. No national parliament’s approval is required to operate the fund except in Finland. Hence, when the True Finns, who are against bailouts, won 19% of the vote, becoming the third biggest party in the Finnish Parliament, and the possibility of this party being part of a coalition government has raised concerns that Finland could veto the Portuguese bailout. However, an agreement has been reached between Finland’s two biggest political parties so there was a parliamentary majority in favour of the bailout to Portugal.
The EU’s finance ministers met on 16-17 May to endorse the Portuguese bail out deal. On 16 May, the eurozone ministers formally endorsed the financial assistance to Portugal, by unanimously approving the loan from the European Financial Stability Facility (EFSF). On 17 May, the Council adopted a Decision on granting Union financial assistance to Portugal. The EU finance ministers approved the €26 billion loan from the EFSM. The bailout of Portugal is therefore shared in equal parts, amounting to a total of €78 billion. The IMF will contribute with €26 billion and the EU with €52 billion from which €26 billion will come from the European Financial Stability Mechanism (EFSM) and the European Financial Stability Facility (EFSF), respectively.
The EFSF does not entail the UK’s participation. As abovementioned, the Council, acting by a qualified majority on a proposal from the Commission decided to grant financial assistance to Portugal, under the EFSM. Consequently, the UK cannot veto it. Such a facility is guaranteed by the EU budget and all EU Member States, including the UK, are jointly liable for any payments due. Hence, if Portugal fails to pay back the loan, all Member States would have to pay into the EU budget to cover the default. According to the Government the UK’s contribution to the EU 2010 budget have been estimated at 13.8% so the UK’s liability would be around €3.6bn. The UK is not part of the eurozone but even so is trapped in this mechanism, as it is required to contribute to it. The UK has already contributed to the Irish bailout on all fronts: as a member of the IMF, being part of the EFSM (€2.5bn) and with an extra bilateral loan (€3.8bn). Britain’s contribution to the Portuguese bailout has been estimated to be around £4.4 billion.
The EU leaders have recently agreed to amend the Treaty so that the eurozone Member States could create the permanent European Stability Mechanism. The UK has veto power over any treaty amendment yet David Cameron has not used his negotiating power effectively. At the UK’s request, the EU leaders agreed that Article 122 (2), once the new mechanism enters into force, would no longer be needed to safeguard the financial stability of the euro area. The UK has, therefore, a political commitment but no legal guarantee that the EFSM, based on Article 122.2 will be repealed in 2013. The future crisis mechanism will only be effective from 2013, so consequently, until this happens the UK will contribute to any eurozone bailout through the European financial stabilization mechanism. During the Treaty amendment negotiations, David Cameron should have demanded that any future bailout should use just eurozone money and that Article 122.2 TFEU should not apply even before 2013. Article 122(2) TFEU is not an appropriate legal base for the European Financial Stabilisation Mechanism and the UK could have challenged the mechanism, bringing an action for annulment before the European Court of Justice. Alistair Darling agreed to the mechanism, David Cameron, during the negotiations at the European Council, have not endeavoured for new arrangements to be decided so that Article 122.2 is no longer used and UK would be no longer liable, consequently British taxpayer are now under the obligation to underwrite eurozone Member States’ bailouts. As Bill Cash MP said “The eurozone decided on its own course in creating the euro with its economic policies and must pay for its own failures. Britain can’t afford them.”
The EU/IMF financial aid to Portugal will be provided on the basis of a three-year rescue programme, which was negotiated with the Portuguese caretaker government, by the Commission, the ECB and the IMF, and endorsed by the EU finance ministers. The economic and financial programme includes structural reforms, so that Portugal is therefore required to reform its labour market, judicial system, public services and housing and services sectors, a fiscal consolidation strategy including “an ambitious privatisation programme.” The progammme also includes “Measures to ensure a balanced and orderly deleveraging of the financial sector and to strengthen the capital of banks, including adequate support facilities.” The Commission will make the EU financial assistance to Portugal available by instalments. Portugal should receive the first instalment, around €18 billion, by the end of May. According to the Council Conclusions “The EFSM loan will have a maximum average maturity of 7.5 years and a margin of 215 basis points on top of the EU’s cost of funding.” Jose Socrates has said, “The government has reached a good agreement that defends Portugal.” However, under the terms of the memorandum of understanding, including higher taxes and spending cuts, Portugal will face two years of recession. This will make it even more difficult for Portugal to return to a financially healthy path and to pay its debt.
It is important to note that the EU ministers said in a statement, “At the same time, the Portuguese authorities will undertake to encourage private investors to maintain their overall exposures on a voluntary basis.” Portugal has therefore been asked to encourage private bondholders to maintain their exposure to Portuguese debt on a voluntary basis. This was one of the conditions imposed by Finland for supporting the Portuguese bailout. Although Olli Rehn said debt restructuring is not on the cards for Portugal, he noted that this clause is an open door for a renegotiation of Portuguese debt.
Portugal is now the third eurozone country to be bailed out. We have been told that this would be the last bailout but we have heard this before. When Portugal asked for financial aid, Spain said immediately that it wouldn’t be the next. Elena Salgado, the Spanish Economy Minister, said that the risk of contagion “is absolutely ruled out...it has been some time since the markets have known that our economy is much more competitive.” However, there are no guarantees and if Spain asks for a bailout, one could wonder how Brussels would react as presently none of the EU funds have enough money to bail out Spain. Last March, the Euro-area leaders agreed that the effective lending capacity of the EFSF should be 440 billions euros until the entry into force of the ESM. Nevertheless, no agreement has been reach yet on the details on how to expand the effective lending capacity of the EFSF. They could not reach an agreement whether they should increase the amount of state guarantees beyond the €440 billion or use cash contributions. Additional guarantees would place a further burden on AAA-rated countries, including France, Germany and Finland. According to Jyrki Tapani Katainen, Finland would support the proposal to extend to €440bn the EFSF effective lending capacity as well as the creation of the permanent European Stability Mechanism (ESM). However, at their meeting on 16 May, the eurozone Finance Ministers have not reached an agreement yet on this issue. It is important to recall that the eurozone leaders agreed on a European Stability Mechanism with a capital base of €700bn. Hence, when it enters into force in 2013, the ESM would have an effective lending capacity of €500 billion, through a combination of €80bn of paid-in capital and €620bn in the form of callable capital and of guarantees from eurozone states.
There are no reasons to celebrate the first anniversary of the Greek bailout, which has proven to be a failure. In May 2010, eurozone finance ministers and the IMF agreed on a €110 billion aid package to Greece. At the time there was no guarantee that Greece would not default even with the eurozone financial help. Last March, the eurozone leaders have decided to adjust Greece interest rate on its loans by 100 basis points (1%). Moreover, they decided to extend the maturity of the loans to Greece from three and a half to seven and a half years. Greece obtained a lower interest rate on its €110bn bailout in exchange for further austerity measures. Greece has mainly been required to complete its privatisation programme, and sell off €50bn in government assets. Angela Merkel has accepted extending the term of the EU’s bailout to Greece, amid concerns that the country could not avoid a sovereign default. The EU has been avoiding the unavoidable. Since the bailout, Greece has not cut its budget deficit. The austerity measures have not reached the desirable outcome. There is widespread opinion that Greece’s default on its debt is inevitable. The European taxpayers won’t see their money back. However, the European Commission, eurozone and particularly Angela Merkel have been against any form of Greek debt restructuring, at least until 2013. They say that debt restructuring would be “devastating” for Greece and above all devastating for eurozone. Unsurprisingly, the eurozone is particularly worried with the risk of contagion to other countries.
Not long ago, the Economic and Monetary Commissioner, Olli Rehn, said “We do exclude restructuring, (…) We have a solid plan. It is based on a very careful analysis of debt sustainability.” However, Greece was supposed to return to the markets for financing in 2012, as foreseen in the bailout programme, but that is very unlikely to happen. The eurozone Member States and EU institutions have now realised that Greece needs more money, from the EU or other international institutions, around €60bn, to cover debts in 2012 and 2013, as it wont be able to return to the capital market.
On 16May, a Greek debt restructuring has been considered for the first time. Jean-Claude Juncker, the president of the eurozone finance ministers, said, after the meeting “If Greece makes all these efforts (raise €50 billion through privatizations), then we must see if it is possible to make a soft restructuring of Greek debt.” He stressed “Greek must privatise a large part of its heritage(…)” Soft restructuring has been understood to entail delaying repayments of Greece’s debts agreed with its creditors as well as lowering of the interest rate on the debt. It would entail creditors agreeing on a voluntary basis to accept later repayment, in the end of the day it’s default. Moreover, Mr Juncker, expressly said, according to the Europeanvoice, that he opposes to a “hard restructuring” of Greece’s debt because “the contagion effect on other eurozone economies is too great”. The so-called hard restructuring would, therefore, entail a forced default.
It is important to recall that the ECB has bought around €40 billion worth of Greek sovereign debt and so it would be seriously affected by a Greek debt restructuring. Unsurprisingly, Mr Trichet is rejecting a Greek debt restructuring. It is also important to note that the major holders of Greek debt are German and French banks. Ms Merkel is against any debt restructuring before 2013. Furthermore, Christine Lagarde said “A restructuring or a rescheduling, which would constitute a default situation, what we would call a credit event, are off the table for me.” Nevertheless, sooner or latter Greece would default.
A second bailout to Greece is not off the cards. Bearing in mind that UK has not participated in eurozone financial help to Greece, consequently it should not participate in any further bailout. George Osborne has to put his foot down so that any further financial help to Greece would not come from the EFSM.
One could wonder whether the bailed out countries would be able to implement the austerity measures with their population protesting on the streets. If ever any more proof was needed that the bailouts do not work, of just piling up debt, it is Greece’s current situation. In fact, what the eurozone tried to prevent one year ago – the restructuring of Greek debt, is now unavoidable.
The bailouts have not improved Greece and Ireland’s situation but it has increased their level of debt. Eventually Ireland and Portugal, as Greece, would have to restructure their debts. British taxpayers would not see their money again. One could say that it would have been better for these countries to withdraw from the euro. However, the other eurozone Member States would never allow this, as it would be the beginning of the end of the euro. It is important to note that under the Lisbon Treaty Member States may withdraw from the EU but not just the eurozone. The Treaties provide no exit clauses from the EMU.
How the eurozone would get out of the mess remains to be seen. Brussels is doing whatever it can do to save the euro, but rush solutions, particularly when laws are broken cannot proven to be useful. However, the EU institutions and EU leaders refuse to admit the failure of eurozone. For how long are Member States willing to pay for the debt of eurozone countries to avoid defaults? Would we see the collapse of the eurozone or would there be further integration – a formalised fiscal transfer Union?