Bailout bind

The strikes and protests in a tiny country in the corner of Europe ruined the lunches of plenty of powerful people in Brussels on Thursday. A rescue plan for Greece was not on the official agenda for the summit President Van Rompuy called back in January, and so, according to media reports, Greece was to be discussed over food with European Central Bank President Jean-Claude Trichet.

Greece's current spiralling debt, and the unwillingness of the population to accept the government's solution by public cuts, called for immediate action. Greece needed cash, and the country's crisis threatens the single currency itself. Since Greece is in the 16-country eurozone, foreign exchange traders cannot relieve their concerns about Athens going bust by selling off the drachma – their only option is to dump the euro, threatening a full-blown crisis for the currency.

Before Thursday's decision to help Greece out, market speculators were rubbing their hands. Reports suggest that traders and hedge funds had placed an $8-billion (5.8-billion euro) bet that Greece's problems will result in a fall in the value of the euro. If Greece were simply left to default on its debts, the attention of these speculators would turn to much larger states with massive public deficits, such as Spain, Portugal and Ireland. If these too were pressurized by the markets, the euro, and therefore the EU itself would be endangered.

European Commission President Jose Manuel Barroso circulated a briefing paper ahead of Thursday's summit stressing the urgency of the situation. If action is not taken, "it would reduce our standard of living, put enormous strain on our social systems and diminish Europe's role in the world," he wrote.

Bail out or call the IMF?

Germany, with its own state debt already above EU regulations, is preparing to grit its teeth and back a plan to bail Greece out. The alternative would be to call in the International Monetary Fund to create a program to help Greece. But that would mean losing face, as Daniel Korski, Senior Policy Fellow of the European Council on Foreign Relations, told Deutsche Welle. "It would be very damaging for the EU if Greece had to rely on the IMF," he said. "It would send a signal that the solidarity upon which the Maastricht project was built no longer exists. The EU is in a bind: if it doesn't handle this crisis well, the pressure on the euro increases, and huge questions will be brought to the fore about the entire European project."

IMF funding is intended as an aid to poor countries. Three EU countries – Hungary, Latvia and Romania - already receive IMF money at the moment, but they are all outside the eurozone. EU leaders are afraid that allowing a eurozone country to receive IMF funding would damage Europe's political credibility.

"I think prestige is the least of the EU's worries right now." Daniel Gros, director of the research institute Center for European Policy Studies, told Deutsche Welle. "In the long-term, if it works, I think it will be well-received. If it doesn't, well, it's too early to say. But Europe could be taken even less seriously than before. If the thing works brilliantly it will be different, but it's unlikely that it will work brilliantly."

Zsolt Darvas, Research Fellow at the Bruegel think-tank in Brussels, agrees. "I'm a bit confused about the 'credibility' argument," he said Thursday. "Europe has already lost a lot of credibility. The situation itself is damaging enough. The European policy-makers are too proud to invite the IMF to solve the problem, even though this would be the easiest and the clearest solution, because the IMF has a lot of expertise and a lot of money."

The IMF would indeed be ideally placed to solve the Greek problem, which is, unlike the Spanish and Irish problems, primarily fiscal. "If the Greek people were to protest against the IMF, the IMF wouldn't care," Darvas continues. "If the Greek people demonstrate against Europe, that would be, from a political point of view, quite important."

Double risk

Darvas also believes there are big risks in the EU's bailout plan. "Let's say EU leaders provide Greece with lots of money, on the condition of the implementation of their program. But what if people go on the streets to block the program? It would be a failure, and at that point there would be no other option but to call the IMF, and then it would be even more damaging to Europe."

Another risk in the bailout plan, Darvas believes, is the unhealthy example it sets. "Other eurozone countries will say, 'Okay, we can relax, because in the worst case we can go for help inside Europe.' So they will not cut their budgets as strictly as they should." This, as far as he is concerned, is much more serious than the loss of face that an IMF intervention would entail. "The EU will obviously remain a global player, and Greece is really very small," he says.

Korski, who has greater concerns about the political damage of IMF intervention, also admits, "I don't think anyone around the world thinks that the EU is about to go under economically. Although there might be some bouts of introspection in Germany, now that China has passed Germany as the world's main manufacturing motor, I don't think anyone seriously worries about the EU."

All the problems the EU has, Korski believes, are bound up with the world-wide recession, and not with an intrinsic economic problem, and he also believes this is recognized around the world.

Daniel Gros, for his part, is convinced neither by the bailout plan or the IMF solution. "What would work better is to prepare clear rules for what happens if a country goes bankrupt. But that of course is not a very polite thing to do among heads of state, and that's why it's not being done."

Author: Ben Knight
Editor: Michael Knigge