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By Paolo von Schirach
January 15, 2012
WASHINGTON – A sad but powerful illustration of EU indecisiveness about dealing squarely with the whole sovereign debt mess is that more than two years after the explosion of the Greek crisis, most incredibly, the issue is still wide open. In fact it has gotten much worse. As The Financial Times put it on January 14/15, 2012: ” Talks over Greece’s debt restructuring broke down yesterday, making it increasingly likely that Athens will become the first government of a developed country in more than 60 years to suffer a full scale default on its debt.“
Many attempts, no final fix
Bill Gross, who runs Pacific Investment Management, (Pimco), the world’s biggest bond fund, agrees: Greece is heading for default, he says. Now, this is some nice record to be proud of. The first bankruptcy of a “first world” nation in modern history. And Greece, let’s remember, is a country supposedly connected with the European Union, the largest trading block in the world, capable, if it wanted to, to deploy significant fire power to protect one of its own.
No point going through the whole story. But let’s just remember that there was one bail out that did not do the trick, followed by another, bigger one that was supposed to stabilize this unfortunate country. Both the EU and the International Monetary Fund led the effort aimed at rescuing Athens. In the meantime, Greece selected Lucas Papademos, a reputable technocrat, as its new, (and hopefully more credible), Prime Minister.
Small country, easy solution?
At the time, most commentators thought that Greece would be fixed, because it is a relatively small country with a small economy. Indeed Greece in 2010 had a GDP of only $ 318 billion, while the entire 27 member strong EU had $ 14.8 trillion and Germany, its most important economy, had a GDP of 2.9 trillion. Surely mighty Europe could take care of its little brother gone astray. Well, it turned out that it could not. Greek 10 year bonds now have an appalling 34% yield, about 32% above German bonds. This alone should tell you something about how successful the rescue operation has been.
Big EU fiscal coordination master plan ?
Sure enough, the EU is supposedly working now on a new comprehensive compact on fiscal coordination, although we already get rumors of built in loopholes aimed at keeping the spending wiggle room that the new agreement is supposed to eliminate.
These tentative steps towards objectives that may very well be politically unachievable, combined with serial failures to fix the Greek problem, convey one basic impression: lack of seriousness.