EU Admits Earlier Bailout Terms Untenable
The threesome of EU president Herman Van Rompuy, EU Commission Chairman Jose Barroso and Greek Prime Minister George Papandreou held what was more a briefing than a conference (as only two questions were allowed) and the word that sprung to mind was confidence.
The briefing about the EU plan was intended to inspire confidence in the EU and the Euro but it remains to be seen whether last night's threesome was a real confidence builder or a confidence trick.
The evolving plan repudiates the subtext of the bailouts up to now. Originally, countries in need of a bailout would pay high interest rates to ensure that donor countries would not be excessively penalized and the profligate countries would also learn the lesson that a breach of budgetary discipline carries a severe penalty.
Now Greece, Ireland and Portugal will receive lower interest rates and a longer period to repay loans.
A great deal of effort was expended to convince the financial world that Greece was a unique case. Greece alone required PSI – private sector involvement, it was explained, and the image of re-inflating a tire comes to mind.
Private sector involvement in the Greek case was a euphemism for a default, but that word like the name Voldemort from Harry Potter is not to be uttered. Private lenders will get less interest, and will have to roll over old and maturing Greek debt by assuming new debt. They are to be assured by the declaration that this time the EU is fully committed to backing this debt and has the tools for speedier intervention.
If the mostly American rating agencies quibble and insist on calling it a default, then they are to be removed from their perch as financial umpires. This was a solution called for only in the case of Greece.
In answer to the question of how even more lenient terms can extricate Greece from its debt doldrums, a Marshall plan was promised for Greece. Greece will be provided with investment capital to grow its way out of debt while remaining in the Euro.
Does that mean Volkswagen plants near Athens and Phillips factories near Saloniki? Where is the money to come from? If companies relocate to Greece, it may mean closing factories elsewhere, arousing indignation in central Europe.
French President Nicolas Sarkozy, perhaps the star of yesterday's proceedings, also spoke last night and exuded confidence partially inspired by his belief that the crisis would serve as a springboard for closer integration amongst the 17 countries of the euro zone:
"By the end of the summer, Angela Merkel and I will be making joint proposals on economic government in the eurozone. Our ambition is to seize the Greek crisis to make a quantum leap in eurozone government."
The underlying assumption is that euro zone economies more closely managed by sound and practical European leadership were less likely to get into trouble.
The French president also revived his pet project of a two-speed Europe. Knowing that the proposals for closer economic coordination, perhaps leading to a European taxation system, would be anathema to the British and Swedes, the French president wants a tightly integrated inner core that allows the more wary British, Swedes etc. to form an outer core that might opt out of the arrangements.
The British, who have consistently opposed the idea, signaled a major switch when the Chancellor of the Exchequer, George Osborne, told the Financial Times in an interview that it was in the interest of Britain that the Euro be salvaged. Perhaps, he said, the only way it could be saved was via the economic unification of the euro zone.
Britain would stay out of that inner core, and its price for acquiescing would be the lifting of commitments to the EU that it found burdensome- for example, the obligation to limit the workweek. Sarkozy would have his inner core of countries closer to the Brussels "sun," provided that Britain and others are allowed to drift further away, exchanging positions from Jupiter to Uranus.