Slovakia is the only eurozone country that has not supported the expansion of the European Financial Stability Facility (EFSF). Although this decision is unlikely to prevent the EU from trying to save the Greek economy - where there's a will, there's a way - it is evidence of serious problems in the eurozone economy, solutions to which are yet to be found.
Money down the drain
Late at night on October 11, Slovakia's parliament voted against the expansion of the EU's bailout fund from 250 billion to 440 billion euro, even though the eurozone leaders had agreed on it in July.
One can understand the Slovaks, whose per capita GDP is among the lowest in the EU - about 17,000 euros. They just don't see why they should help the Greeks, who earn about 29,000 euros a year per capita. "A poor country does not want to help one that has been granted much more generous subsidies," said Yevgeny Gavrilenkov, managing director of the Troika Dialog group. "The issue of solidarity aside, it is not clear why the poor should help the rich."
Many economists say that the EU's financial aid package will not help reverse the negative economic trends in Greece. "The Greek economy will never be able to service its 350 billion euro debt," said Yelena Matrosova, macroeconomic research director at the BDO Unicon consultancy. "Slovakia and other countries see that the establishment of the EFSF will not solve the problem but is an attempt to buy time." There are no growth points in the Greek economy, so it is useless to throw good money after bad.
However, many analysts believe that European officials will find a way to convince Slovakia. "They will vote the issue again and again until they hammer out an agreement," Gavrilenkov said.
The European leaders will not accept their defeat. German Chancellor Angela Merkel has already said that despite the failure in Slovakia, the EFSF expansion will be ratified before the EU summit scheduled for October 23.
Why waste time?
The delay with the EFSF expansion has pinpointed serious problems in the European Union, in particular a far from perfect system of governance. Gavrilenkov believes the EU states have created the most democratic decision-making system that should take into account the interests of small nations. But this system fails when non-standard decisions must be taken quickly and effectively.
"This is why the EU is sometimes compared to a clumsy and inflexible behemoth who can't find its way," said Viktor Mizin, deputy director of the Institute of International Studies at the Moscow State Institute of International Relations (MGIMO).
But the biggest problem is that no one knows what to do with Greece and other distressed EU economies. Analysts polled by RIA Novosti said the Greek bailout can create breathing space but will not resolve the EU's economic problems. Furthermore, Greece is not the only European country in trouble. "Some former members of the eastern bloc, in particular Romania, are fully dependent on EU subsidies," Mizin said. "What will happen to them if they lose this lifeline?"
The solution for Europe's economic problems may be very painful, although not as painful as the possibility of the eurozone's dissolution and the re-introduction of national currencies. Yelena Matrosova said the EU will have to print more money. "It needs an additional 2 trillion euros," she said. "This would devalue the debts but at the same time provoke hyperinflation and devaluation of the euro."
The leading European economies, in particular Germany, do not like this solution. Germany, which has shouldered the bulk of aid to the distressed EU economies, does not understand why it will have to accept growing prices and devalued savings. Incidentally, this scenario would have a very negative impact on Russia, whose economy relies heavily on imports from the EU.
While the purse is not empty yet
The hypothetical dissolution of the eurozone, which analysts are discussing as a growing possibility, will be extremely painful. "The world is not yet ready for the disappearance of the euro and the return of the dollar monopoly," Gavrilenkov said. "The re-introduction of the national currencies will shake up the financial markets."
But Europe's time has not run out yet: It still has sufficient reserves for quantitative easing, that is, for stabilizing economies through money injections. Even assuming that Greece is beyond salvation, the European economy will need money for other purposes. "Everyone agrees that there will be money injections, and quite large ones, from 200 billion to 1.5 trillion euros," Gavrilenkov said. "If Greece defaults, the EU countries will have to do something to support their banks."
The analyst is convinced that the most fierce debates will be waged not on the quantitative easing, but on who will do it and how. Will the task be entrusted to the European Financial Stability Facility and national governments, or, as Germany insists, business must assume part of the responsibility?
Russia's commodities-based economy would benefit from this solution. Analysts say that if the EU approves large money injections, oil prices will not fall dramatically. The worst one can expect is a short-term decline in oil prices amid the general panic, like in 2008, but they will soon resume growth on the wave of money injections.
The views expressed in this article are the author's and may not necessarily represent those of RIA Novosti.
