European summit proposes bailout and austerity plan for Greece

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European summit proposes bailout and austerity plan for Greece
By Alex Lantier
27 March 2010

A two-day European Union (EU) summit in Brussels concluded yesterday,
announcing plans for an as-needed bailout package for Greece and
tougher sanctions against eurozone countries whose deficits exceed
European guidelines. The meeting caps weeks of rising tensions between
the major European powers over how to deal with the Greek debt crisis.

The plan was adopted late Thursday night, incorporating word-for-word
a statement written by German Chancellor Angela Merkel and French
President Nicolas Sarkozy a few hours earlier. It specifies that the
International Monetary Fund (IMF) and the eurozone countries could
jointly bail out Greece, if Greece adopted devastating austerity measures.

The plan left maximum ambiguity over support available to Greece, so
Greek Prime Minister Giorgios Papandreou could keep citing financial
pressures to justify wage, job and pension cuts. However, reports
cited estimates of a potential Greek bailout at €22 billion to €30
billion, two-thirds of which would come from the eurozone. Eurozone
countries would contribute in proportion to their respective capital
vested at the European Central Bank (ECB), which issues the common
currency.

The 16 eurozone countries must unanimously agree to the bailout for it
to take effect. This effectively gives Berlin, which was most strongly
opposed to a European bailout scheme, veto power over any proposed
bailout. The summit statement added that the bailout “mechanism has to
be considered ultima ratio,” that is, a last resort to avert default
by Greece.

The plan did not specify the interest rate at which eurozone countries
would lend, but declared it would be “non-concessional, not
contain[ing] any subsidy element” — that is, higher than rates charged
by the IMF. Greece will have to refinance €23 billion in debt in April
and May, prompting concerns of another credit crunch. It is currently
paying unsustainably high interest rates—around 7 percent, roughly
double the rate paid by Germany.

In a move to boost bank profits and calm fears on the financial
markets of a Greek default, the ECB lowered its credit requirements on
bonds it will accept as collateral for loans. This will increase
private banks’ willingness to lend to Greece, as they can now get cash
from the ECB in exchange for bonds rated as low as BBB-, including
BBB+-rated Greek bonds. The banks will make huge profits from the
difference between the high rate paid to them by the Greek government,
and their own payments to the ECB, which is currently charging only 1
percent interest.

In a statement at the end of the summit, EU leaders proposed setting
up a task force to ensure “better budgetary discipline.” The
eurozone’s Stability and Growth Pact calls for limits of budget
deficits to 3 percent of gross domestic product (GDP). The pact
provides for fines and penalties against countries breaching these
requirements, but these sanctions are typically not enforced: Greece
has violated the limits six times, and Portugal, France, and Germany
have each violated them five times.

“It’s simply a fact that ... at present the handling of deficit
procedures isn’t sufficiently regulated,” German Chancellor Merkel
told a news conference. She called for changes to the EU treaty in
response to eurozone budget problems.

The IMF is an institution that mainly bails out debt-stricken Third
World countries, while requiring massive budget and wage cuts. It has
not intervened in Western Europe since the 1970s. Its intervention in
Greece is a stark warning on the character of the bourgeoisie’s plans.
The IMF funded bailouts in a number of Eastern European countries,
including Hungary, Romania, Ukraine and Latvia, after the 2008 credit
crisis sparked by the collapse of Lehman Brothers. They give an idea
of the type of measures being considered in Greece and the rest of Europe.

In a briefing last month to Bloomberg News, S&P analyst Frank Gill
spelled out the consequences of the IMF intervention in Latvia. With
staggering pay cuts of 45 percent in the public sector, and 5 to 30
percent in the private sector, “wage levels are once again very
competitive.” Moreover, Latvia’s economy has suffered a 19 percent
decline, with unemployment hitting 22.8 percent in December—the
highest in the eurozone.

The poverty conditions imposed on Latvian workers preclude improvement
in the economy or state finances, Gill noted: “What is missing is job
creation. Only job creation will put a floor under the economy. Until
then, without question, wage deflation and rising unemployment will
weigh heavily on public finances.” Gill expected the Latvian economy
to contract again in 2010.

As for the eurozone governments, they have indicated their unanimous
support for imposing similar conditions in Greece—while demanding
higher interest rates for their loans. The bourgeois press widely
praised the IMF intervention as a way to strengthen governments’
offensives against the working class.

Thus, Le Monde welcomed IMF involvement as “a relief, both from a
financial and ‘psychological’ standpoint. The EU is not used to
confronting the unpopularity of shock therapies and might give in to
street demonstrations in Athens. The IMF, on the other hand, will not
hesitate to rely on its reputation as a ‘big bad wolf’ to help the
Greek government impose sacrifices on the population.”

Such plans are a damning indictment of the sclerotic character of
European capitalism, and the pseudo-democratic façade its political
regime gives to the dictatorship of the banks. They also intensify
national divisions within Europe.

Other European countries, particularly those in a weaker financial
position, have tried to project an accommodating stance. Spanish Tax
and Economy Minister Elena Salgado claimed Spain would be willing to
provide €2 billion—its share of the bailout—to Greece. The current
value of this pledge is unclear, however, as the other 15 eurozone
members are not proposing to proceed with a bailout.

In a March 15 Financial Times interview, French Finance Minister
Christine Lagarde criticized German economic policy: “Clearly Germany
has done an awfully good job in the last 10 years or so improving
competitiveness. When you look at unit labour costs, they have done a
tremendous job in that respect. I’m not sure it is a sustainable model
for the long term and for the whole of the group.”

Such comments have found a largely hostile reception, however. The
German bourgeoisie has no intention of increasing wages or allowing
its competitors to take back market share. Alexander Dobrindt, general
secretary of Bavaria’s Christian Social Union (CSU), called Lagarde’s
comments “outrageous” and “the behaviour of a bad loser.”

In an interview with Der Spiegel, Deutsche Bank chief economist Thomas
Mayer said, “We can’t really apologize for the ability of our
industries to compete internationally,” adding that Germany “cannot
apply the brakes to competitiveness artificially.”

However, he conceded that this was also an economic dead end for
German industry, once other European countries begin cutting their
deficits: “It will be inevitable that our neighbors will buy less from
us, because they don’t have the money.”

Berlin is refusing to give up the advantages that have helped make it
one of the world’s leading export powers: a substantial low-wage
workforce policed by social legislation like the Hartz IV laws, and
export markets inside Europe that use its own strong currency, the euro.

The Daily Telegraph recently reported that Germany’s export surplus is
expected to reach $190 billion this year. Citing EU figures, the
Telegraph estimated: “Germany has gained some 30 to 40 percent in cost
advantage against Italy and Spain since the mid 1990s, and over 20
percent against France.”

Re-establishing Europe’s economic equilibrium on the basis of
competition and private enterprise entails a devastating cut in wages
and living standards, plunging the continent into depression.

A similar, if superficially different, proposal came from four
professors—Wilhelm Hankel, Wilhelm Nölling, Karl Albrecht
Schachtschneider and Joachim Starbatty—whose March 25 comment in the
Financial Times called for eliminating the euro.

They noted that to return to competitiveness, “The Greeks would need
to devalue by 40 percent. But in a monetary union, that is
impossible.” They called for Greece to “leave the euro” and “recreate
the drachma,” Greece’s former national currency. The drachma would
plunge in value, making Greek exports more competitive and
impoverishing workers through inflation in the cost of imported goods.

Fearing that deficit spending involved in a Greek bailout would lead
to inflation, they threatened: “Should eurozone governments provide
assistance to Greece in a manner that contravenes the no bail-out
rule”—that is, a 1993 ruling of Germany’s constitutional court
mandating that Germany will participate in the monetary union only if
it obeys inflation-fighting guidelines—“we would have no hesitation in
lodging a new lawsuit at the constitutional court to enjoin Germany to
depart from monetary union.”

http://wsws.org/articles/2010/mar2010/eusu-m27.shtml

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