More than six months have passed since Brussels sat back and watched pre-default Greece careen toward the Eurozone's central station like a runaway train, threatening to blow it to smithereens.
Finally, on May 10, the European Union resolved to establish a "mechanism for financial stability." Only now it turns out that it's not just Greece that needs to be saved, or even just the Eurozone, but the EU itself.
The "relief fund" is a staggering 750 billion euros, or over $1 trillion. The bailout has already calmed the panic, but it has not led to the necessary structural changes within the Eurozone, the 16 countries that use the euro. Their differences are simply too great in terms of economic development, debt, and - the main problem with all Eurozone countries - their capacity for economic recovery.
Here, briefly, is the agreement reached on May 10 in Brussels. Brussels, with the help of the IMF, will establish a 750 billion euro stabilization fund. The 16 members of the 11-year-old Eurozone must provide 440 billion euros, while the IMF will contribute 250 billion euros. The remaining 60 billion euros will come from the remaining EU member states. For example, the UK will go pound-for-pound, so to speak, with Eurozone members France and Germany, each contributing 15 billion euros. The money will be lent to debt-ridden governments to pay off their creditors at an average interest rate of 5%. These governments can no longer raise money by issuing new government bonds. There is so little faith in Greece now that best long-term loans it can get have annual interest rates of 7% to 8.5%. By comparison, German government bonds are selling with a rate of 2.9% and UK bonds are at 3.9%.
To get a sense of the scale of the impending calamity, let's recall that the U.S. was forced to cover the bad loans of American banks in 2008 to the tune of 545 billion euros. The EU is allocating 750 billion euros for the bad loans of entire countries.
Insolvency isn't just plaguing the euro. It is threatening to destroy bond markets in general, triggering a new financial crisis. The EU's total foreign debt is approximately 5.17 trillion euros according to Eurostat. Germany's debt alone is estimated at 1.2 trillion euros, while Greece's debt is around 300 billion euros. By the end of this year, Italy has to come up with 267 billion euros in interest, while Spain must pay 81 billion euros. Theoretically, the 750 billion euros will be enough for Ireland, Italy, Greece, Portugal and Spain to service their debt until 2013. But then what?
The Obama administration, in addition to the bank bailouts, has allocated another 659 billion euros (around $800 billion) in economic stimulus. This is not an option for the EU. They have thrown money around to cover their budget deficits and provide a stopgap for their debt obligations. But the debts themselves remain. Sooner or later they will have to be paid, and so far, no one has said how this will be accomplished. Austerity measures will cause demand to drop off, resulting in lower economic growth and declining revenues, which will in turn require further austerity measures. The Greeks, who have taken to the streets to protest the proposed spending cuts, have given other EU countries a taste of what they can expect if they try to tighten their belts.
As is often the case, Brussels, having come late with the relief, elegantly sidestepped its own laws and constitution. Neither the Maastricht Treaty, which created the Eurozone, nor the Lisbon Treaty reforming it, allow the European Central Bank to buy up countries' debt or issue loans to governments in need that do not observe the limits on debt and deficits. But in this emergency situation, the ECB has already started buying up debt, but not from the insolvent governments themselves. It is buying their bonds on debt markets.
So it seems that the entire fiscal policy of the ECB and the EU is undergoing a change, and the rules on financial discipline and the overall economic policy in the EU could be next. Expanding the Eurozone is most likely out of the question now.
France is the clear winner in the current battle over the aid package. French President Nicolas Sarkozy has long called for some kind of "economic government" in the EU that would strictly enforce fiscal discipline and coordinate the economic plans and budgetary measures of EU member states. It looks like he finally got his wish. The biggest loser is Angela Merkel, who insisted until the bitter end that the Germans would not save the bankrupt EU countries. Ultimately, Germany was left with no other choice. Conservative newspapers have already denounced her "betrayal" of German taxpayers. It looks like cracks are emerging in the Paris-Berlin alliance once again. This is never good news for the EU. So where is there good news these days? Anywhere but Europe, that's for sure.
The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
MOSCOW. (RIA Novosti political commentator Andrei Fedyashin)
