Home > English, Europe, World Events > Beyond Greece, Eurozone Has Other Achilles’ Heels

Beyond Greece, Eurozone Has Other Achilles’ Heels

By Marquis Codjia

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The current brouhaha over Greece’s budgetary mischance and its alleged adverse effects on Europe are an epochal episode in the history of the emergent European economic zone, but these are not the decisive areas where decision-makers, including political leaders and financial markets participants, should pay heed.

Greece’s debt pains would ultimately be resolved, because Eurozone behemoth Germany will strategically come in line with its continental peers; also, supranational channels – such as the European Central Bank and the IMF – will be coerced into using their balance sheets to provide liquidity to cash-strapped Hellenes.

The real fear presently is contagion – avoiding that the ambient financial pandemonium metastasizes into other economically comatose countries within the union. If any of these countries, clustered under the unflattering acronym of P.I.G.S. (Portugal, Italy, Greece, Spain), is downgraded by rating agencies – as was recently the case for Spain and Portugal who lost a few notches, the potential bailout costs and risk premia will rise stratospherically.

Eurozone leaders should swiftly settle Greece’s problems because of perception risks. No doubt the country is a financial and geostrategic dwarf (2% of Eurozone GDP and no major federal institution headquartered). Plus, other ‘weakest links’ such as Spain and Italy possess far greater self-financing capacities and have a different debt structure (domestically held vs. 95% of Greek debt held by foreigners). Notwithstanding, if trans-European perception is that Eurozone will not show geo-economic solidarity vis-à-vis its members in times of uncertainty, then the concept of political union loses its relevancy, and economic agents, including financial markets, will certainly reflect their despondency by driving the single currency lower.

Broadly, other systemic inefficiencies continue to thwart progress within the Eurozone.

First is the lack of a clear political structure in the federation. European leaders, particularly those from prominent countries (UK, Germany, France), seem at this point more content with a federal hierarchy replete with political figures (preferably from minor countries) who pose no leadership threat to them, and a plethora of bureaucratic institutions filled with functionaries picked on an unwritten pro-rata rule to satisfy member states. This strategic stance of an elusive political union grounded in an economic zone is antithetical to the very concept of federation that subtended the initial EU agreement.

To illustrate this, let’s consider a simple example: whom would current U.S. President Barack Obama or China Premier Wen Jiabao negotiate a strategic partnership with if either leader needs a European counterpart? Would they call upon the current President of the European Commission José Manuel Durão Barroso? Or the current President of the European Council Herman Van Rompuy? Or the current (6-month rotating) President of the Council of the European Union José Luis Rodríguez Zapatero? Or EU heavyweights French President Nicolas Sarkozy or German Chancellor Angela Merkel? Or a combination of all of these leaders?

Second, the lack of a clear, single political leadership begets an absence of a uniform socio-economic agenda in the union. It seems as though European leaders want the pros of economic integration, but abhor its cons altogether without attempting to minimize or obliterate them. EU citizens must define what the Eurozone stands for: is it a free-trade area, similar to NAFTA (North American Free Trade Agreement) or ECOWAS (Economic Community of West African States), where partner countries retain their political, economic and social independence, and can compete against each other? Or is it a political and economic union steered by broadly uniform national social policies, similarly to a single country? Or is it, rather, something in between, or neither?

Third, European Central Bank’s powers must be broadened beyond price stability. Unlike the U.S. Fed, the bank’s only primary mandate at the moment is to keep inflation low, with other objectives subordinate to it. The ECB should intervene further in the regional economy, and help avoid systemic disequilibria if need be. In sum, the institution should be allowed to use its gigantic reserves to calm jittery markets in times of uncertainty, among other roles.

Fourth, Eurozone membership should be reviewed; this includes not only the admission process, but also membership conditions and stipulations for exclusion. Understandably, the political undertones of this process call for some diplomatic verbiage, but overall, countries seeking membership in the privileged “Club Euro” must meet stringent criteria, and such criteria should be thoroughly enforced. The current Stability and Growth Pact, which aims to limit budget deficits and debts, is a good start but the ineffective control scheme around it permitted the kind of statistical fraud that Greece authored when seeking admission nearly a decade ago. In sum, sound economic fundamentals and strict governance rule, in addition to geography, should be the rationale for co-opting new members into the Eurozone.

Finally, the EU enlargement process should pay special attention to two key dossiers: U.K. and Turkey. The argument here is not in favor of a quick admission (in Turkey’s case), but for a clearer acceptance framework, more effective than the current 31-chapter “Acquis Process”.

Both dossiers are complex and politically charged, but their quick resolution will do more good than harm to the EU. Turkey has many woes (human rights concerns, Cyprus dispute, perception of Islamism despite the country’s secularism, business regulation, etc.), but its advantages are also interesting. It is 16th largest GDP in the world – per IMF’s 2009 ranking, outpaced in the Eurozone only by Germany, U.K., France, Italy and Spain. This means that, out of the current 27 EU members, it ranks 6th on GDP measurement. The country is geographically larger than any EU member and its ca. 73 million citizens are outnumbered only by Germany’s ca. 82 million; this may open up potential new markets for growth-seeking EU businesses. Politically, Ankara is an important geostrategic ally of the West and a member of such key organizations as G-20, OECD and NATO.

As for the U.K., a current EU member that opted out of the Eurozone, its Labor Party-led government defined in the late 1990s five economic tests that must be met prior to adopting the Euro as national currency, either via parliamentary ratification or referendum. Euro adoption remains a domestic hot button issue and thus may not be addressed for many years. But, it’d be interesting to see how politicians and business leaders will react once the euro reaches parity with, or gradually outpaces, the pound sterling. So far, the euro has risen 65% vs. the pound, from a low of 57 cents in 2000 to 94 cents a decade later, briefly nearing parity late in 2008 (.98 in December 2008).

  1. EuroGeek
    May 3, 2010 at 6:50 pm

    Great article, the Eurozone problems are not done yet.

  2. John
    May 3, 2010 at 6:51 pm

    I agree that Europe has more work to do and the bailout may not be enough.

    Greek debt: Bailout concessions not nearly Spartan enough
    ATHENS, GREECE – DECEMBER 10: Youths clash wi…

    Image by Getty Images via Daylife
    Greece has announced the austerity measures — actually, I should make that “austerity measures” — that the nation is willing to commit to in order to secure $146 billion in bailout money from the IMF, the European Central Bank and a very generous rest of Europe.


  3. Yelena
    May 3, 2010 at 6:52 pm

    Greece is guilty of all the crisis that’s on them. They cheated on their stats and lived beyond their means. Now its reckoning time!!!

  4. Stephan
    May 3, 2010 at 6:54 pm

    European community is still young, and they’ll have to go thru many predicaments before they make it.

  5. Eurolover
    May 3, 2010 at 6:54 pm

    Europe will succeed!

  6. Raoulo
    May 3, 2010 at 6:57 pm

    Good insights here

  7. Hierna R
    May 3, 2010 at 6:58 pm

    Germany needs to help other countries in europe otherwise she’ll suffer sooner or later.

  8. Biarritz Boy
    May 3, 2010 at 6:59 pm

    We need our own rating agencies in Europe!!!!!!!!!

  9. PB
    May 3, 2010 at 7:02 pm

    Thanks for sharing this post 🙂

  10. Gol Pol
    May 3, 2010 at 7:08 pm

    Expect many social movements in Greece even though those fat bankers that the country bailed out many months ago are not back at it trying to speculate and sink them; pathetic!

  11. Foison
    May 3, 2010 at 7:09 pm

    Greece needs to get out of Eurozone, clean its financial house and reapply for admission. Plain and simple

  12. PIGS
    May 3, 2010 at 7:10 pm

    Watch out Portugal, Spain and Italy, next we’re coming after you 😉 😉 😉

  13. Lance K
    May 3, 2010 at 7:12 pm

    Good info here and nice food for thought.

  14. Brown
    May 3, 2010 at 7:13 pm

    Check what Germans r saying

    By Andrea Thomas


    BERLIN (Dow Jones)–German Finance Minister Wolfgang Schaeuble Monday warned against talk of restructuring or deferring repayment of Greek debt because such talk would hurt markets’ trust.

    He said that there will be a meeting Tuesday in Berlin with representatives from banks, which will be attended by Deutsche Bundesbank President Axel Weber and BaFin financial sector watchdog head Jochen Sanio. The meeting will address the role of banks in helping Greece.

    “We have agreed in the Eurogroup [meeting of euro zone finance ministers Sunday] that each finance minister will talk with key representatives of the financial sector of his country in order to lobby for the persuasive power of this program and for the financial sector to continue to be involved in the Greek market,” Schaeuble said, adding that this is aimed at helping Greece to be able to eventually refinance itself on the markets.

    Speaking to reporters after the Cabinet approved the Greek bailout bill, which foresees EUR22.4 billion in guaranteed loans to the debt-ridden country, Schaeuble also said that Germany knows about its “European responsibility” to “defend the stability of the euro.”

    He stressed that the insolvency of Greece must be prevented.

    Schaeuble reiterated that he hopes the German parliament will pass the bill Friday and that the government will then ask President Horst Koehler to sign the bill to make it come into effect.

    Greece will receive up to EUR110 billion in emergency loans from euro-zone countries and the International Monetary Fund. The euro zone’s members will contribute EUR80 billion, with EUR30 billion coming from the International Monetary Fund.

    “This agreement offers a convincing chance for Greece to overcome its difficulties,” Schaeuble said.

    EUR10 billion of the package has been set aside for a Financial Stability Fund that will help Greek banks if their capital adequacy is threatened.

    Schaeuble said that Greece may not need to fully tap the EU-IMF bailout package.

    “I hope that it won’t be fully exhausted,” Schaeuble said.

    Asked about a voluntarily contribution of the commercial sector to the Greek bailout, Schaeuble said he can “only acknowledge it” but that it hadn’t been a topic in the Ecofin meeting of euro-zone finance ministers.

    The Institute of International Finance, a global, 390-member association of major financial firms in which Deutsche Bank AG (DB) Chief Executive Officer Josef Ackermann is chairman, said late Sunday that “IIF board members have agreed to play their part in supporting the Greek government and Greek banks.

    “This will be in the collective interest of their institutions, stockholders, Greece, and the European and global financial systems,” given the importance of contributing to the restoration of confidence and stability in the circumstances surrounding Greece, the IIF said in a press statement.

    Website: http://www.bundesfinanzministerium.de

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