The European Union took steps Wednesday to rein in the fiscal chaos that has brought Athens to the brink of financial disaster in recent months. Leaders of EU member states agreed at a summit in December that Athens should be left to its own devices to deal with its deficit crisis, but the European Commission moved this week to invervene to fix Greece's fiscal mess out of fear it could spiral into a systemic crisis for the euro.
European Economic and Monetary Affairs Commissioner Joaquin Almunia is seeking to portray himself as the tough sheriff. Indeed, he announced Wednesday that Brussels would take the historically unprecedented step of striclty monitoring Greek government spending. But his real message is this: We're not going to abandon you. The markets also understood the message with the euro exchange rate against the dollar ticking upwards after the announcement.
Almunia has sketched out an austere fiscal regime that Greece will have to adhere to in the coming months. It includes immediate budget cuts in all areas and progress reports that must be sent to Brussels every few months. The first is already due on March 16. That should please Europe's fiscal hardliners, particularly Germany's conservatives.
At the same time, Almunia hasn't imposed any sanctions against Greece and he has also extended by two years the deadline for Greece to bring its budget within the euro zone deficit spending limit of 3 percent of gross domestic product. Currently, deficit spending in Greece is at 13 percent, more than four times the limit stipulated by the stability provisions in the Maastricht Treaty for countries that share Europe's common currency, the euro.
Although the extended date may be closer to reality, it is still an illusion. If a country as economically strong as Great Britain only plans to halve its deficit spending from a current 12.6 percent to 6 percent in four years, then how will a perpetual problem country like Greece pull off a miracle and reduce its equally massive deficit spending in an even shorter period of time to 3 percent?
Europe Fear's Lehman Brothers Knock-On Effects
But hope is the lifeblood of Europe's common currency, and Almunia's primary goal is to stop euro speculation on the financial markets. The commissioner said that the EU has sufficient instruments at its disposal to solve Greece's problems. He didn't provide any concrete details, but his words were sufficient to give the markets the illusion they apparently needed. The possible tools available to the EU include loans to Greece right up to a common Eurobond, which would see other countries backing a Greek bond. In the worst case scenario, the International Monetary Fund could also provide credit -- but that's a disgrace Europe would prefer to avoid.
So far, every form of EU aid has been rejected in Brussels out of principle. The thinking has been that governments that live beyond their means should not be rewarded for their behavior. But the case of Lehman Brothers shows that sticking to principle, while tempting in theory, doesn't always work well in practice. And it appears the European Commission has come to the conclusion that Greece is Europe's own version of Lehman -- it is simply too big to fail. It was the Lehman Brothers collapse in fall 2008 that fueled the global financial crisis.
Economically, of course, Greece is a dwarf, producing a meager 3 percent of the EU's economic output. But a bankruptcy could have the same kind of knock-on effects as the bankruptcy of a major US investment bank. One couldn't rule out a domino effect in Spain, Portugal and Italy. US economist Nouriel Roubini pessimistically wrote of "Europe's sinking south." It's an experiment the EU cannot afford.
Further Aid in Sight
Indeed, it is unlikely that intense EU surveillance of Greek finances, as announced by Almunia, will be the last of the measures imposed. Brussels cannot simply decree an immediate shrinking of the deficit below the 3 percent threshold. Greece's problems are deep and it will take time to solve them. No European country would be able to do what is being asked of Greece: a complete reform of its health and pension systems and the streamlining of its economy within just a few years.
It remains to be seen whether the Greek population will go along with the tough measures announced by Prime Minister Giorgos Papandreou in a television address on Tuesday. The first step foresees the cutting of salaries in the public sector by 4 to 6 percent. The budgets of all ministries are to be slashed by 10 percent and the retirement age raised. Taxes on fuel, tobacco and alcohol will also rise.
Even Ireland, which ran into serious problems of its own last year, was better off. Public salaries there were cut by a whopping 20 percent, but civil servants in Ireland were among the best paid in Europe. Furthermore, the country had already made fundamental changes to its economy by focusing heavily on the service sector -- changes that Greece has yet to address.
A Herculean Task for Europa
Brussels now faces the question as to how much reform Greece can take before social unrest becomes widespread. The first strikes have already begun. No matter how necessary far-reaching reform may be, it can hardly be pushed through against the will of the population -- meaning that the Greek tragedy could dog the euro-zone for years to come.
Much of the fault for the current predicament can, of course, be found in Athens. After all, Greece massively manipulated its books in 2001 to be admitted into the euro zone. But the rest of the countries belonging to Europe's single currency looked the other way for far too long, preferring instead to ignore the problem.
In Greece, it is said that it will take a Hercules to fix the country's finances. But perhaps another character from Greek mythology will be able to do the job: Europa.