Better late than never. That is one way of looking at the three-year, €110bn rescue plan for Greece that was announced on Sunday by eurozone governments and the International Monetary Fund. It took seven months of indecision, bickering and ever-mounting chaos on the bond markets for the eurozone to get there, but in the end it did – and it may just have saved European monetary union as a result.
Looked at in a different light, however, the rescue package does not appear to be such a masterstroke. For its underlying premises are, first, that there should under no circumstances be a restructuring of Greek government debt, and secondly, that Greece’s troubles are unique to itself and need not be considered in a context of wider eurozone instability. Both premises are open to question.
For sure, the rescue plan removes the short-term threat of a debt restructuring. And with French and German banks heavily exposed to Greek debt, it is understandable that European policymakers are anxious about the impact on Europe’s banking system of a restructuring.
But for the rescue plan to work over the longer term, everything will depend on the willingness of Greek society to endure sacrifices on an unprecedented scale and on the determination of the Greek government to push through its austerity measures in the face of steadily rising public resistance. According to some economists, such as Erik Nielsen of Goldman Sachs, Greece will have to engineer a decline in private sector nominal wages of 15 per cent to restore its international competitiveness. A decline of up to 20 per cent will be required to generate the current account surpluses needed to continue making interest payments to foreign creditors. This would be a colossal challenge for any government – let alone a socialist government in Greece.
As for the eurozone more generally, it is, I am afraid, unrealistic to think that the Greek problem can be sealed off and dealt with as if it has no impact on the other 15 euro area countries. Contagion is no longer a risk - it has, in fact, already started, most notably in Portugal but to a limited extent in Ireland and Spain as well.
What would it cost the eurozone to launch rescue plans for these countries? Only educated guesses are possible. Still, based on the size of the Greek package, you may be looking at €70bn for Ireland, €70bn for Portugal and a jaw-dropping €400bn for Spain. The rest of the eurozone is simply not equipped, politically, financially and psychologically, to extend help of that magnitude.
There is still time to prevent this apocalyptic scenario from coming to pass. Immediate, forceful deficit-cutting measures are essential in Portugal and Spain – what their governments have done so far is nothing like enough to calm financial markets. A European-IMF contingency plan to cope with other Greek-style crises needs to be put together. And to convince the markets that Europe is serious about defending its monetary union, eurozone governments should endorse rapid steps to closer economic and budgetary policy co-ooperation.
All this is achievable with the right political leadership. But the way that Europe handled the Greek crisis after it erupted last October does not fill me with confidence.
Get alerts on World when a new story is published