New York Times Editorial: The Not-So-Safe Euro Zone

New York Times Editorial: The Not-So-Safe Euro Zone
Copyright by The New York Times
Published: February 1, 2010
http://www.nytimes.com/2010/02/02/opinion/02tues2.html?th&emc=th

The euro is facing the most serious crisis in its 11-year history. Greece, one of 16 European Union members that uses the currency, must raise $76 billion this year — more than $50 billion of it before June 30 — or default. A default would threaten the euro’s global credibility, scare investors away from other struggling European economies and likely reverse Europe’s fragile recovery.

Despite those very real dangers, Europe’s richer nations — most loudly Germany — have been acting as if this is someone else’s problem. Last week, the French newspaper Le Monde reported that Germany and France had begun contingency planning for possible financial assistance. Both governments denied it. We hope the report turns out to be true. Failing to develop a plan to step in if needed would be incredibly shortsighted.

The euro is wondrously convenient for travelers and international businesses. There’s one catch: Fiscal discipline is up to each participating country, and Greece has been anything but disciplined. It is running a deficit of nearly 13 percent of total output, more than four times the nominal limit for countries using the euro. Its national debt is almost double the permitted limit. With its credit rating sharply downgraded, Greece must pay a stiff premium to finance that deficit.

The economic fortunes of all the euro-using countries are too tightly linked to contain the crisis to one of them. And Greece may not be alone for long. Similar financing crises could soon hit Ireland, Spain and Portugal. Market anxieties threaten the currencies of Poland, Hungary and the Czech Republic.

For years, Greece fiddled its figures. In flusher times, too few questions were asked. Now the truth, and its consequences, must be faced: Corruption and tax evasion hobble the Greek economy. Millions work off the books. The private sector generates too few jobs and tax revenues, and one in four Greeks works for the state. It is a system designed to produce deficits.

The new Socialist government promises to cut the deficit to less than 3 percent within three years — and without outside help — by slashing public spending, improving tax collection and reforming the nearly bankrupt pension system. Those are necessary steps. But foreign investors are rightly skeptical that Greece can achieve the magnitude of savings required at a time of recession and rising social and labor unrest.

Nor should the entire burden fall on Greece — one of the European Union’s smaller and poorer economies. Any bailout must be accompanied by greater restraints on the fiscal sovereignty that Athens so egregiously abused. Letting Greece fail would be a disaster for all of Europe.






E.U. Warns of Tough Supervision of Greece’s Budget
By STEPHEN CASTLE
Copyright by The New York Times
Published: February 3, 2010
http://www.nytimes.com/2010/02/04/business/global/04drachma.html?ref=global-home


BRUSSELS — The European Commission on Wednesday approved Greece’s plans to stave off financial ruin but warned that the country’s progress back from the brink would be subjected to unprecedented monitoring from Brussels.

Far-reaching cost-cutting plans are at the heart of Greece’s plans to curb a deficit of 12.7 percent of gross domestic product — more than four times the permitted ceiling for countries sharing the European Union’s single currency. That has prompted alarm in markets and weighed on the euro in recent weeks.

But the markets reacted positively Wednesday, suggesting that the statement had at least bought the Greek government some breathing space. The yield spread between 10-year Greek and German bonds narrowed 24 basis points and the euro gained against the dollar for the third consecutive day.

At a news conference, Joaquín Almunia, the European commissioner for economic and monetary affairs, called the Greek government’s objectives and targets “ambitious” but “achievable.” However, he added, “every time we observe slippages we will ask the Greek authorities to adopt additional measures.”

Late Tuesday, before the European Commission’s assessment, the Greek prime minister, George Papandreou, announced a series of additional austerity measures, including the extension of a public sector wage freeze across the board in 2010 and a raise in fuel taxes. He also hinted at raising the retirement age.

The government in Athens wants to reduce the deficit to 3 percent of G.D.P. by 2012.

The crisis over Greece’s wayward economic management has posed unprecedented challenges for the 16 countries in the euro zone. The euro fell to a six-month low last week — before recovering slightly — on fears that a Greek default would undermine other weak members, leading to a domino effect. The markets have been alarmed by the size of deficits in Portugal, Spain and Ireland.

“Greece is in the center of a speculative game aimed at the euro,” Mr. Papandreou said in a speech. “We are the weak link in the euro zone. We must act immediately and decisively.”

Mr. Almunia said he was using powers under the Union’s new governing treaty to step up scrutiny of the Greek program. He announced what he described as “detailed and permanent monitoring,” with a series of regular deadlines for progress reports, the first of which will fall on March 16 and the second on May 16.

Mr. Almunia rejected suggestions that the International Monetary Fund should be called in. “I am fully convinced that the E.U. and the economic and monetary union have enough instruments to cope with the challenges to solve this problem,” he said.

He also said that the euro’s future was not under threat. “It is not the first time we have heard people saying that the euro is not going to work,” he said. “For 10 years we have been able to show that economic and monetary union is a success.”

Greece’s economic predicament is particularly toxic since not only is its deficit huge, but the country’s debt also amounts to 113 percent of gross domestic product. Though it was hit by the financial crisis, Greece had failed to get its finances in order during the previous decade, when economic growth was generally good.

Worse, a sudden and drastic upward revision of its deficit following a change of government last year exposed alarming deficiencies in Greece’s abilities produce reliable economic data.

Mr. Almunia also announced the formal opening of legal action against Greece over its failure to provide accurate economic statistics. And he said there had been an agreement in principle within the European Commission on the need for new powers for the Union’s statistical service, Eurostat, to audit the accounts of member states. Such a proposal would need approval by national governments.

This was the second time this decade that Greek data has been called into question, and that legal action had been taken against Greece in 2004 over its statistics.

However officials insist that, because Greece is not one of the euro zone’s larger economies, its problems can be absorbed. European leaders have discussed privately how they could come to the aid of the government in Athens if necessary. The Greek economy represents about 2.5 percent of the euro area’s G.D.P.

Domestically Mr. Papandreou has a difficult balance to strike with the risk of widespread unrest if he pushes his austerity measures too far. Greece’s border with Bulgaria has been blocked by thousands of farmers demanding more subsidies and higher prices for their produce. A wave of strikes later this month is expected to test the government’s nerve.

“We are making an effort to stop the country from going over the cliff," Mr. Papandreou said after meeting party leaders to seek their support, Reuters reported. “The government is determined to take all necessary measures”