Cause and Effect in European Politics and Law

Greece on the Edge Again, Italy Follows Suit

Ralitsa Kovacheva, September 5, 2011

The mission of the European Commission, the European Central Bank and the International Monetary Fund (the so called Troika) in Greece, which was doing a consecutive review of the Greek economic programme, has terminated its work and left Athens. According to the concise official statement, the reason is “to allow the authorities to complete technical work, among other things, related to the 2012 budget and growth-enhancing structural reforms.” The deadline for the Greek authorities to do their homework is until mid-September, so the experts can go back and finish their work.

Behind these ostensibly calm words, there is a lot of tension boiling up. Because they mean that Greece is again not meeting its commitments made in exchange for the loan from the EU and the IMF, and that puts under threat the receiving of the next tranche. If that happens, Greek default would look inevitable. Such a scenario would completely deprive of reason the titanic efforts made so far on agreeing a second rescue programme for Greece, along with the restructuring of a part of its debt.

According to The Financial Times, the reason for the termination of the negotiations were strong disagreements between Athens and its creditors on how to fill the projected budget gap of 1.2 billion euros, as well as doubts that Greece had been delaying the implementation of structural reforms, privatisation and improvements to tax collection. Without additional measures the Greek deficit will reach almost 9% of GDP - well above the target of 7.6%, the newspaper wrote quoting an economist familiar with the negotiations: “The recession accounts for only part of the shortfall ... Deep spending cuts need to be implemented at once”.

The EU and the IMF forecast that the Greek economy would shrink by 3.8% this year, while the Greek authorities predicted a 5% downfall. Meanwhile, a leaked report from the newly established State Budget Execution Monitoring Office said that the Greek debt levels were “out of control” and this would not change even if all the agreed measures were implemented.

According to The Financial Times, the only comment made by Evangelos Venizelos, Finance Minister of Greece, was that the government had no plans to adopt extra austerity measures and the recession was the only reason for the missed budgetary targets. Such an attitude would hardly inspire the national parliaments in the euro area to support the decision of their leaders from 21 July for a second rescue programme for Greece. Greek yields have risen to new record heights which clearly shows the market reaction to the situation.

Italy - a step back

As if not to let itself lag behind Greece, Italy has begun to retreat from its announced austerity plans worth 45.5 billion euros. A week before being voted on in Parliament, the initially ambitious measures of Berlusconi's cabinet have already been significantly changed as a result of pressure from the political parties, the trade unions and the business. The centre-right coalition itself has opposed the so-called solidarity tax, proposed by the government. Under pressure from local authorities, the proposed cuts to their financing will be reduced. Some of the envisaged amendments in the pension system have also been eliminated or significantly changed.

The European Commission refrains from commenting before seeing the final draft of the measures that it will be voted in Parliament. But Brussels is concerned that the replacement of the solidarity tax with measures against tax evasion is risky because there is no way to predict their effect on the budget. A fresh and instructive example of that is Greece again, especially given the fact that the problem of tax evasion has existed in both countries for years.

While Greece and Italy provoke European concerns, the Troika missions in Ireland and Portugal ended with positive assessments and a decision the next tranches of their loans to be disbursed. According to the statement of the Council, “the Irish and Portuguese programmes were on track, with the respective authorities meeting important programme milestones and demonstrating their commitment to addressing underlying weaknesses in public finances and the financial sector and as regards competitiveness”.

EU Treaty changes again?

Against this background, German Finance Minister Wolfgang Schäuble has raised again the question of changing the EU Treaty, in order to allow more power for financial and economic policy to be transfered to Brussels. The Brussels-based online medium EurActiv quoted statements of Mr Schäuble, as reported by the daily Bild Zeitung. Far-reaching financial governance reforms are needed to solve the debt crisis and that would likely require a new EU treaty, German Finance Minister is reported to have said. This should be made, he argued, no matter how difficult a treaty change would be and even if the result could be a complete separation of the eurozone countries from the rest in the EU.

Although this thesis is meeting resistance, especially in Germany, Mr Schäuble not for the first time argues that Brussels must obtain more power in terms of financial and economic policies in the euro area in order to exercise efficient control and sanctions. German Chancellor Angela Merkel is also a supporter of the idea, although she is sceptical about changing the Treaty. For the same reason, when the permanent rescue fund for the euro area (the European Stability Mechanism, ESM) has been created, the European leaders did everything possible the Treaty changes to be done through the simplified revision procedure to avoid referendums. However, this cannot happen in the case of transferring more sovereignty to Brussels by the member states, as described by Wolfgang Schäuble, because it is the issue of sovereignty that requires some members to hold referendums.

Given the situation in Greece and the Italian concerns, the need of a strong central governance of the euro area seems more pressing. As you know, France and Germany have recently proposed the creation of a eurozone government headed by the President of the European Council, Herman Van Rompuy. However, this will not be sufficient to provide the necessary discipline through strict supervision and sanctions. Thus, although Treaty changes will be painful, perhaps the time is coming when they will prove inevitable.