My stopover in Brussels on the way to the Balkans last week proved less than illuminating on the issue of the eurozone crisis and Greek debt. The real decisions are made further east, in Frankfurt and Berlin, but the EU apparat appears confident that there will be no Greek default in the short term and that Athens will not leave the eurozone.
What will happen later in the course of 2012 is harder to predict, however. “The crisis has reached a systemic dimension,” European Central Bank President Jean-Claude Trichet told European lawmakers in Brussels on Tuesday. “Sovereign stress has moved from smaller economies to some of the larger countries. The crisis is systemic and must be tackled decisively.” For his part the president of the European Commission Jose Manuel Barroso says that all 27 EU nations have a stake in the Greek rescue—not just those in the eurozone—because a tumbling common currency would be a calamity for all.
Greece is in the grip of a recession and yet it is forced to accept further austerity measures to reduce a public debt which will exceed 160 percent of the country’s gross domestic product this year. It is evident that it cannot repay its sovereign debt, and the political will in the eurozone for further bailouts is wearing thin. The situation is untenable regardless of what the government in Athens does. On the other hand, the holders of Greek bonds would have to settle for a cut of more than 60 percent in what Greece owes them, according to Jean-Claude Juncker, the head of the eurozone’s finance ministers. This was the first admission by a high-ranking EU official that just how drastic the “haircut” will need to be. The original figure was only 21 percent.
Juncker’s statement would have caused a storm only a few months ago, but today it is accepted that Greece is entering bankruptcy proceedings under whatever name. Many European banks holding Greek debt will be hard pressed to stay afloat without injections of government liquidity. Where will it come from? The ECB prefers government guarantees rather than the central bank’s money market operations. The ECB says governments should use the 440-billion-euro ($600 billion) European Financial Stability Facility to insure a portion of new bonds issued by debt-strapped nations. That would theoretically leverage the amount available to protect member states such as Spain and Italy from following in Greece’s footsteps. The trouble is that even this amount will be woefully inadequate to overcome M. Trichet’s “systemic weaknesses.”
The elephant in the room is the future of the European Union itself. It is to be feared that “saving the euro” and averting further financial woes will be used by the proponents of the EU superstate as a means of imposing ever tighter political controls on the member-states. That superstate is an evil concept devoid of political, economic, historic or moral logic; which is why Sr. Barroso and the rest of the Brussels Machine will do their best to make it a reality.