Austerity futile in face of Greek default

Greece is once again teetering on the brink. It was supposed to agree a €130bn bailout deal with the EU/IMF on Monday. It has been postponed twice. The deadline is Feb 15.

Greek politicians are nervous. They feel that they have not even had time to read or consider the agreement properly, which will saddle them with another mountain of debt, on top of the €110bn bailout it already received in May 2009.

Meanwhile, there are huge protests on the street. The situation is tense. EU leaders are holding their breath waiting for a Greek signup.

So far Ireland is the poster child of the bailout countries of Portugal, Greece and Spain. In the downgrading of the credit ratings of nine eurozone countries before Christmas by Standard & Poor, Ireland emerged favourably.

It is clear that Kenny and Noonan have attempted to appease the troika and credit rating agencies by being the champions of austerity, wanting to cosy up to the troika and the markets.

This is most likely being done for two reasons: to paraphrase Enda Kenny, Ireland will pay its way, so there is a healthy dose of economic patriotism. This may well be disguising a strategy of fiscal obedience in the short term to gain a reduction in Ireland’s debt burden from the troika.

The second reason is Ireland’s return to the markets, which happened last month with the exchequer raising over €2bn in bond issues, albeit at a high interest rate of 7%. However, this is still only half of the bond rate which was intrinsic to forcing the bailout in Dec 2010.

Nonetheless, the appeasement strategy is not guaranteed to prove effective. This is because the EU response to the sovereign debt crisis is limited to being a one-trick pony: In downgrading the AAA credit ratings of France and Austria before Christmas, Standard & Poor made it very clear that the wide-ranging austerity across Europe, which is having such a catastrophic effect on the Greek and Irish economies, may not work.

Economists such as Prof Nuriel Roubini and Prof Paul Krugman of Harvard have said that such unilateral policies are tantamount to economic hari kari.

For Greece, Ireland and the other eurozone countries, the fiscal compact of the new European Stability Mechanism will force governments to have a structural deficit of less than 0.5%. The plan commits to a €500bn bailout package, which may rise to €700bn.

Positive measures to bring down unemployment seem to be almost non-existent.

Our one-track plans will be thrown in to disarray if Greece defaults in a disorderly fashion: The first Greek bailout of €110bn did not come from the EFSF but from bilateral arrangements between EU member countries and Greece. This would spur contagion across Europe.

Germany has signed guarantees for €119bn. The very countries up to their eyes in debt have also signed them: France €90bn; Italy €78bn, and Spain €52bn. The enlarged EFSF to the ESM of €500bn to €700bn for bailouts could be double downgraded and interest costs would rise for guarantors. More contagion would follow. At that stage Ireland and the EU would be back to ground zero and the softly-softly approach of Noonan and Kenny would be in serious jeopardy.

* Dr Tom O’Connor is a lecturer in Economics & Public Policy at Cork Institute of Technology