Euro’s future looks shaky as nations struggle to escape mountains of debt

THERE is considerable confusion about the “deal” reached by European finance ministers to bail out the Greek economy.

Some ministers stress that the deal will be used a last resort only after the country has implemented draconian cuts and the Greek prime minister has yet to formally make an application for financial assistance.

It seems clear, however, that the deal will be rolled out once some legal footwork to circumvent the no bailout clause in the Maastricht treaty has been worked out by Germany.

It will involve all 16 eurozone countries buying at least €20 billion, and up to €25bn, of the Greek debt.

Greece will still have to find at least another €28bn this year through further debt restructuring.

The Greek monetary crisis, however, underlines a profound and deeply rooted problem for the eurozone.

The facts are that 13 of the 16 eurozone countries are in breach of the stability and growth pact. Their budget deficits exceed 3% of GDP and their debt to GDP ratios exceed 60%.

Helping Greece leaves this problem unsolved.

Countries borrowing heavily causes their currency to haemorrhage abroad to pay the government’s borrowings, resulting in a deterioration in its balance of payments. This capital flight puts downward pressure on the exchange rate.

This is compounded by the flight of currency investors from the country, based on a perception that it is becoming insolvent and unlikely to provide a return on investment.

This has been happening to the eurozone in recent times. The evidence for the financial markets’ disdain for the unhealthy finances of eurozone countries is borne out by the exchange rate movements of the euro against several currencies.

The euro fell sharply against the dollar since last December dropping from $1.52 to $1.37. On February 25, the euro fell to an all time low of 120.6 Japanese Yen and since then has barely climbed to 124.

The deal on Greece will offer some respite for other countries by setting up buyers for Greek bonds in a co-ordinated way.

This prevents a steep drop in bond prices where other heavily indebted nations try to sell government stock together. Ireland is one of these countries.

However, if the German finance minister Wolfgang Schauble gets his way, there will be a heavy price to pay for countries forced to seek support from other eurozone members. A European Monetary Fund, modelled on the IMF, would be used to finance such situations.

Schauble is demanding draconian interest rates be levied on countries that an EMF is forced to bail out. They may also lose their EU voting rights and pay exorbitant fines. In order to avoid this from happening, he is demanding a strict implementation of the stability and growth pact rules.

Greek workers are being forced to pay higher taxes to pay debt and narrow the country’s deficit. This has resulted in huge unrest in the country.

In order to defend to euro, Schauble and others are demanding a punitive financial discipline in the years ahead. They realise that if the euro collapses, then the EU project is badly dented, if not fatally damaged.

However, the cost of keeping the euro afloat may be too high. Given the collapse of the stability and growth pact across 13 countries, it is hard to imagine how any rapid improvement can be achieved. It is also difficult to imagine how Greek-style EMF solutions could be feasibly applied to many other member states who are debt laden.

It is very difficult to expect strict fiscal and monetary co-ordination among 16 disparate nation states.

Short term bailouts for Greece and other countries will not convince the markets that the euro is sound.

The future of the currency looks decidedly shaky.

Tom O’Connor is a lecturer in economics at Cork Institute of Technology