It has been eleven years since the formation of the Euro Zone. At the time, noted economist Milton Friedman stated that the Euro Zone would collapse upon facing the first major crisis that pitted the interests of one country, against those of another. More and more, it appears that the Greek debt crisis could be the very incident that Freidman predicted.
The Euro Zone is comprised of EU countries that use the euro as their official currency and several financial obligations must be met in order to gain membership. These include limiting yearly deficits to 3 percent of the country’s GDP, while ensuring that accumulated debt remains equal to or less than 60 percent of GDP. EU policy also states that individual countries are responsible for their own economic fate, and the EU as an entity will not provide emergency funding to individual countries.
As the true seriousness of Greece’s economic crisis becomes known however, there is growing evidence that, even as part of the first-wave of Euro Zone countries back in 1999, Greece was never in compliance with the debt and deficit requirements. What was initially passed off as a little “creative accounting”, is now being seen as deliberate fraud and corruption. Needless to say, the thought of using taxpayer money to rescue Greece in light of these revelations, is not being well received in other EU countries – several of which have already tightened their own belts to get their financial houses in order.
Despite these public grumblings, and even official EU policy preventing the bailing-out of individual countries, EU finance ministers put the finishing touches on a plan to save Greece earlier this week. In truth, this is not just about Greece – it is really about preserving the currency. The euro has suffered a decline in the past two months of nearly 5.5 percent as questions linger over Greece’s solvency.
“We clarified the technical arrangements that would enable us to take coordinated action which could be swiftly put into place in the event it is necessary,” Luxembourg Prime Minister Jean-Claude Juncker reported following a meeting of EU finance ministers.
There is a fine distinction to be made here – “in the event” the rescue is needed. The official EU line is that Greece is still responsible for implementing the changes necessary to balance the books herself and an EU-led rescue is a last resort. To date, Greece has agreed to a series of tax increases and spending cuts expected to total €4.8 billion (US$6.6 billion).
The EU finance ministers fully intend to hold Greece’s feet to the fire before sending any publically-funded relief. Many officials believe this crisis is entirely of Greece’s own making and is the result of a long history of government and corporate corruption.
“The objective would not be to provide financing at average Euro Zone interest rates, but to safeguard financial stability in the euro as a whole,” read a statement issued by the EU financial ministers.
Currency Blackmail
And there you have it. The ministers feel they have no choice but to support Greece in order to protect the euro itself. Blackmail may not be the polite term to describe the proceedings, but it remains the most apt depiction nonetheless.
Nowhere is the backlash against a taxpayer-funded bail-out more acute than in the Euro Zone’s largest economy. The German populace is decidedly against providing funds to Greece, and is in no mood to play the role of the benevolent financier to a country it feels is incapable, or worse still, unwilling, to manage its own economy.
This sentiment was succinctly captured in the words of Germany’s Finance Minister Wolfgang Schaeuble. In a veiled warning to the other “PIIGs” countries (Portugal, Italy, Ireland, and Spain), Schaeuble last week called for the “expulsion” of heavily-indebted countries from the Euro Zone.
