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12/11/2009

The dire fiscal situation in Greece -- not scheduled as a topic of discussion -- forced its way to the center of the agenda at a summit of European leaders in Brussels on Thursday. For the first time, German Chancellor Angela Merkel suggested the European Union might need to take steps to intervene if the economy of a euro zone member state is on the brink of collapse.

"What happens in one member state affects all others, especially as we have a common currency," Merkel said in Bonn on Thursday, "which means we have a common responsibility."

Merkel's comments marked the first admission by a European leader that the crisis in Greece could have consequences for European economic policy. Looking to the debt problem in Greece and other euro zone members, Merkel said it was "in everybody's interest" to ensure the euro's stability.

Not Making the Grade

Currently the EU has no say in national economic and social policies, and with her comments Merkel, whose country has vigorously defended its own sovereignty on this issue, appeared to be rethinking her position. Merkel said leaders needed to discuss possible ways that the EU could intervene in countries that have built up massive deficits. Merkel's comments appeared to be focused on social reforms. Acknowledging this would represent an incursion into sovereignty, Merkel said: "National parliaments do not like to be dictated to about these sorts of things." But EU leaders nonetheless need to address the problem, she added.

Greece has a long history of failing to balance its budget, but the situation intensified three weeks ago when Finance Minister Giorgos Papakonstantinou said his country's budget deficit would reach 12.7 percent this year instead of the 6 percent that had been forecasted. Earlier this week, credit ratings agency Fitch downgraded Athens from an A- to BBB+, making it the first member of the euro zone to fall from the highest credit rating category. For years, the country has driven up its debt, allowing it to rise to 113 percent of its gross domestic product. Deficit spending for this year alone has been close to 13 percent of GDP, far higher than the 3 percent limit mandated by Brussels for euro zone countries that trade in Europe's common currency, the euro. This week, speculation has grown that Athens could be facing the threat of bankruptcy.

Is Deficit Greece's Problem or Europe's?

With it's lower credit rating, Greece will face much higher interest rates on future borrowing and could have trouble issuing public bonds. Greece has said it would like the European Union to provide a safety net, just as it has done for banks in the 27 member states hard hit by the global economic downturn. However, EU rules stipulate that states cannot provide loans to other member states to cover budget shortfalls or bridge deficits -- a policy aimed at ensuring fiscal discipline and the stability of the euro. Some EU member states, led by Finland and Sweden, are opposed to any loosening of those measures, saying countries should be left to their own devices to clean up any self-made fiscal messes. Indeed, Greece's current problems long preceed the recent global economic downturn.

"What we are now seeing in Greece is, of course, problematic, but it is basically a domestic problem that has to be addressed by domestic decision," Swedish Prime Minister Fredrik Reinfeldt told reporters. Reinfeldt is also the current holder of the European Union's rotating presidency.

Addressing concerns that Greece might be facing insolvency, Jean-Claude Juncker, the prime minister of Luxembourg and chairman of the group of euro zone finance ministers said: "I completely exclude a state of bankruptcy for Greece." He also denied assertions the crisis in Greece could destabilize the euro. And at the moment, he said, it was unnecessary for other EU members to provide support to the beleaguered country.

Revamp the Greek Economy

On Thursday, the Greek Finance Ministry confirmed the country's national debt had swollen to more than €300 billion ($442.59 billion), 120 percent of GDP.

After long delays, the Greek government conceded to other EU leaders that it needed to take action. "The new Greek government is very well aware of its responsibilities to revamp the Greek economy, to modernize the public sector, to fight chronic problems such as corruption and clientelism, to make sure that we have a sound, viable economy," Greek Prime Minister Giorgos Papandreou told reporters Thursday. A day earlier he pledged to cut his budget gap in 2010 to 9.1 percent.

Officials at the European Central Bank in Frankfurt have expressed concern over high deficits in Greece, Ireland and Spain that could influence euro stability. On Wednesday, Standard & Poor's issued a negative credit outlook on Spain, saying it could face a downgrading of its credit rating if it doesn't rein in debt spending. With stimulus and bailout programs relating to the global economic crisis, a number of European countries, including Germany, have struggled to stay within EU deficit spending limits this year, with a number going far beyond them.