To the palpable relief of eurozone governments and private investors, the Greek parliament on Wednesday ratified the country’s Medium-Term Fiscal Strategic Programme – the latest batch of EU/IMF austerity measures – with a slim majority of 17 in the 300-member legislature.
On this vote hinged the allocation to Greece of the next tranche of the €110 billion bailout package the country had agreed to in May 2010, worth €12 billion. Without that, Athens’ treasury would have likely run dry within weeks.
Failure to ratify the mid-term plan would also have had far-reaching political consequences. It would have likely been perceived as a vote of no-confidence in Prime Minister George Papandreou’s government, forcing the country into early elections at a time when what Greece needs most is a stable government. If the result of the vote was negative, the financial markets would have also likely voted with their feet. The cost of Greek credit default swaps – that is, cost of insuring against a Greek sovereign debt default – continued to rise early last week in anticipation of a no vote. Now the outlook is far less bleak.
Still, the key creditors – the European Commission, the European Central Bank and the IMF – need to see both the five-year austerity plan, which would see the state rolled back by €28.6 billion over the five-year period, and key laws implementing structural reforms, as well as controversial state asset sales, before disbursing the next €12 billion loan in July.
All this would also be a prerequisite for continued negotiations among eurozone governments on a second bailout of between €100 billion to €120 billion, which is being ironed out to ensure that Greece will be able to maintain solvency after the loans in the current bailout package are used up. Much of the controversy right now centres on French government plans to encourage private investors to share the cost of the bailout package by voluntarily rolling over a portion of the Greek debt for a long-term period. On this, eurozone authorities are reportedly making progress with Greece’s private creditors – among them many eurozone banks. This should help allay fears of a default and debt restructuring, at least for the time being.
Of course, loans are only a stop gap solution to Europe’s debt crisis. What is needed is an overhaul of the European system of economic governance that got the single currency into this mess in the first place. The Stability and Growth Pact, which has governed the euro area since its inception, should have been sufficient in theory – despite the fact that, with hindsight, it showed itself to be inadequate in harmonising national fiscal policies across the currency union – but problems of enforcement and surveillance gradually eroded the pact’s credibility.
The economic divergences which began to emerge well before the financial crisis left those member states with already poor economic fundamentals in a fiscally precarious state. The role of the EU, now, is to ensure that a repeat of this does not happen. This is the rationale behind the Economic Governance Package currently going through the European Parliament. It seeks to ensure that the divergences that led us straight into this quagmire do not re-emerge. It seeks to ensure that taxpayers will, as far as possible, not be called on to make loans to fiscally irresponsible governments.
As a member of the euro area, Malta contributed €78 million to Greece’s first and current bailout package, after the loan was approved unanimously by our parliament, and Malta was right to do so. A Greek default would have left Europe’s banks with a hole of hundreds of billions of euros to fill. It would be pure hubris to assume that Malta wouldn’t have been affected by a financial catastrophe of such proportions in the eurozone. But, now, the people and the government of Greece must accept that for decades the country lived beyond its means.
It is in the EU’s and Malta’s interest to help a member state in crisis, but it is in no one’s interest, not least that of the people of Greece, for the EU to give a spendthrift country enough rope to hang itself for a second time. The Economic Governance Package, which would include sanctions on recalcitrant euro countries, would be able to ensure that never again will taxpayers have to choose between the economic burden of bailing out a country or the financial upheaval and re-emersion into recession that would surely follow a Greek default.
David Casa is a Nationalist MEP