Brussels, 26/03/2010 (Agence Europe) - Will the long-awaited agreement reached during the evening of Thursday 25 March between eurozone heads of state have the desired effect? The rescue plan for Greece should restore market confidence and bring down Greek state bond rates. When all is said and done, the rescue plan is above all dissuasive, with European leaders hoping they will not need to trigger it. Although the declaration by EU heads of state and government has the merit of clarifying a possible solution, the text contains a scattering of conditional elements that mostly reflect the claims expressed by Germany prior to the summit.
After acknowledging the ambition and the credibility of the austerity measures taken by Greece to reduce its budgetary deficit by 4% in 2010, eurozone member states reaffirm their determination to take resolute and coordinated measures to safeguard financial stability in the eurozone, if necessary. The mechanism, which will only be activated if Greece is unable to achieve debt refinancing (it has not yet requested financial support), will mix (substantial) IMF measures and (majority) eurozone measures. A decision on the provision of bilateral loans from eurozone member states would be taken unanimously and participation would be proportionate to the amount they contribute to the capital of the European Central Bank (ECB). The statement does not indicate whether a state's decision to participate would be made on a voluntary basis (although all states have in fact expressed their willingness). The mechanism will not comprise any subsidy element (respecting the EU treaty and national legislation) and aims to set incentives to return to market financing as soon as possible by risk adequate pricing (not financing at the average rate of eurozone country lending), the statement reads.
Looking ahead, emphasis is also placed on strengthening the coordination of economic policies. Reflection will be conducted by a working group (member states, Commission and ECB), which will examine the necessary measures to strengthen economic and budgetary risk surveillance, providing “a robust framework for crisis resolution respecting the principle of member states' own budgetary responsibility”. The rest of the statement by the heads of state and government also recommends a more important role for the heads of state and government in terms of coordinating macro-economic policies and growth strategy. The European Council must also improve the “economic governance of the European Union”, it is stated in the English version of the statement by the 16 eurozone members. In the French version, however, it speaks of “economic government”. As Herman Van Rompuy specified on Thursday evening, this “does not denote a fundamental difference of view” but reflects “a sensitivity for wording”. He gave his assurance that it was not necessary to place too much importance on this “asymmetrical translation”. We note that the working group to be set in place to assess foreseeable measures will concern all EU27, with the conclusions of the summit also mentioning this point.
With its decision to opt for a mixed mechanism with European predominance, the EU is not only doing a great deal for Greece but also for the stability of the eurozone as a whole, the president of the European Union was pleased to tell the press after the first day of the meeting. Compared to the statement of 11 February (EUROPE 10076), which set a dual objective - that of responsibility on the part of the Greek government and that of solidarity from European partners if necessary - Greece has acted “in a credible manner”, taking additional measures, he said. When it comes to solidarity, he said, the statement clarifies the intentions of Athens' partners and reassures markets that the eurozone will never abandon Greece. While possible bilateral loans will be decided unanimously by member states, “all members said they were ready to take part in the mechanism”, said Herman Van Rompuy, who chaired the separate Eurogroup meeting held during the evening to discuss the draft agreement reached earlier by France and Germany.
Although, initially, some were in favour of IMF intervention, others were not at all in favour. However, “minds have moved on”, said Van Rompuy, considering that a mixed solution was a “balanced and effective solution”.
José Manuel Barroso took the view this was “the only way to reach consensus”, although he finds it “excellent”. “This is the right decision, the decision that had to be taken”, the president of the European Commission said. This is a “safety net for Greece” which is perfectly coherent with the proposals that he had put forward, he pointed out. According to the text, although the bilateral loan mechanism would complete IMF financing, intimating perhaps that addressing the IMF should precede any contribution by member states, Herman Van Rompuy put matters straight saying it was joint intervention between the IMF and the eurozone. “Greece, once it calls for the mechanism to activate, sh ould present its demand for j oint intervention and not separate intervention by the IMF”, he said.
George Papandreou has no intention of calling for aid - it is enough
that the aid mechanism is there, he said
The Greek prime minister said he was most satisfied with the agreement reached on Thursday evening on the mechanism for coming to his country's rescue, while underlining that his country did not intend to call for this mechanism to be activated. “We hope we never need to ask for it”, Papandreou said, speaking to the press on Friday after the European Council. However, the very fact that the mechanism is there is “sufficient for us to move ahead with the implementation of our programme”, he asserted, welcoming the fact that the markets had not reacted lightly to the decision reached on Thursday evening. “We are not yet out of the woods” but “I am sure we will succeed thanks to the Greek people's efforts”, he said. The EU's decision on a rescue mechanism is a “guarantee of the eurozone's stability”, but also “recognition of the sacrifices of the Greek people, that will not be in vain” although there is still a long way to go, Papandreou went on to say. The Greek prime minister restated his intention of carrying out deep reforms in his country's financial and economic structures. Austerity measures decided to date are sufficient to achieve this, the head of government said. “No other measures are needed but what we need is the implementation of those already decided”, he added. Papandreou also pointed out that he would be in favour of strengthening prevention and penalty mechanisms in the Stability and Growth Pact, saying he had “no objection to tougher preventive supervision” as Greece is today paying for the fact that it had not been possible to see the current crisis coming.
Angela Merkel: Involving the IMF is the “right solution” as it has experience in dealing
with crises, which the European Commission does not have
Speaking to the press after the European Council, German Chancellor Angela Merkel hailed the fact that “eurozone countries are not allowing the euro to be destabilised” by the Greek crisis. The rescue plan for Greece, combining IMF intervention with coordinated, bilateral loans from eurozone member states, is an “appropriate solution”, she said. Including the IMF in the mechanism is the “best solution” and the “surest way” as this international financial institution has experience that the “European Commission does not yet have” in managing crises such as that in Greece, Merkel said. Resorting to bilateral loans will only be possible as an “ultima ratio” (very last resort) and interests on such loans should contain “no subsidy element, as otherwise it would be a 'bail-out' banned by the treaties”, she stressed.
On the subject of strengthening surveillance and prevention mechanisms in the Stability and Growth Pact (a German request), Merkel welcomed the fact that the European Council had made this move into “unchartered territory”, entrusting Herman Van Rompuy with creating a working group with member states, the rotating presidency and the ECB to present measures needed for attaining this objective by the end of the year. The working group has not received a specific mandate so “all options are covered - nothing is ruled out” as there are measures that can be taken without amending the treaty while others, such as the creation of a European monetary fund for example, will require revision of the treaties, Merkel explained. One thing is certain: Germany will strongly invest in this working group “as we must draw lessons” from the Greek crisis, she stressed. Greece is today in a situation “in which it would never have found itself if the Maastricht criteria had been respected”, she said. There is therefore a problem with the current rules that do not work as they should - “which requires a systemic response”. Such systemic changes, Merkel said, cannot be made without changes to the treaties. Of course, she added, it would be premature to announce an intergovernmental conference (IGC) for 2011, all the more as the EU is just coming out of long negotiations on the Lisbon Treaty. However, Merkel went on, the Union must be sufficiently “vital” to take the “decisions needed” even if this implies further revision of the treaties - and no-one is keen on that right now. “The bad experiences of the past (Ed.: unending talks on the new treaty) must not paralyse the Union”, she said.
The German chancellor made the point that Germany had no intention of complicating the membership of new members to the eurozone, as long as criteria are strictly met. In answer to an Estonian journalist who was asking about Estonia's chances of joining the single currency area in 2011, Merkel replied, “The entrance criteria haven't changed. I'm working from the assumption that Estonia will be treated by the ECB and the Commission just like any other applicant country. There will be fair treatment. Germany will not set up new criteria”.
She clarified her position on economic governance: Germany supports “economic government” (“Wirtschaftsregierung”), but only if it is EU-wide. Berlin, however, continues to oppose economic government for just the 16 euro area countries.
Once in operation, planned mechanism will be first and foremost preventive, Sarkozy says
“The agreement we have just reached is quite clearly preventive,” stated Nicolas Sarkozy in presenting to press on Thursday evening the outcome of the discussions, an outcome “made possible by the efforts of France and Germany”. The aim was “not to use them” and it was expected that there would be a normalisation in the attitude of the markets, the French President said. “This does make any the less operational. It is detailed and may be activated as a last resort”. The euro area “has taken charge of its own destiny”, giving itself a mechanism for managing crises. It was “a major step” which required budgetary surveillance mechanisms to be re-thought so that there cannot be another crisis. Thus, without prejudging the outcome of the discussions of the working group which will be set up to consider possible improvements, the issue of sanctions may be raised in that body, he acknowledged. At the moment, under the Stability and Growth Pact, the ultimate sanction is financial. “A curious response” for countries which are already in a difficult budgetary situation, the French President noted, suggesting that “this kind of arsenal is not fit for crisis situations”. Ultimately, “the path chosen leaves all options open, including suspending the voting rights of a member state.
After Friday's meeting, Sarkozy returned to this issue. “We will consider, without any preconceived ideas, the most fitting sanctions for countries that do not abide by the rules. Things have calmed and everybody could gauge the strength of the Franco-German front”. France and Germany believe that “the sanctions system” provided for in the Stability and Growth Pact “is not fit for purpose”. “A country which has an excessive deficit is fined. That can't help the situation”. Should the treaty be amended to change the Stability and Growth Pact (as Germany would seem to be calling for)? “It is for that reason that we deliberately did not use the words amendment of the treaty, because for the treaty to be amended, unanimity is required. Not everyone agrees. So we set up a working group, with nothing ruled out and France and Germany will make a proposal on this matter. We have until the end of the year to consider things and to work on this, “Sarkozy said.
Only if market funding is not enough will setting the mechanism in motion be considered, Sarkozy stated the previous day. “This means in quantity as well as in quality … if not the loans are not applied for in full and if we are facing excessively high rates, it will come to the same thing”. Stating what the contributions from the IMF and the euro area respectively might be, he said that “above a third, that is becoming a lot for the IMF” but that “there is room for adjustment”. There is not limit on the overall volume, “conditionality is the Greek government plan,” he said, stressing that “now the markets know that it is the whole euro area and a bit of the IMF that are behind Greece”.
Viable solution, which will not have to be used, Trichet hopes
“I am extremely happy that heads of state and government have been able to find a viable solution,” Jean-Claude Trichet said on Thursday evening. Having somewhat opposed any IMF intervention, regularly stating that a European solution had to be found to a European problem, he would appear to have had to put a brave face on things. With agreement being better than no agreement, the European Central Bank President hailed the fact that European leaders had assumed their responsibility. “I have confidence in the fact that the mechanism adopted today will not, in principle, need to be activated and that Greece will gradually win back the confidence of the markets,” he added. He stated that he had always argued that euro governments should assume as much responsibility as possible, while acknowledging the IMF capabilities.
Juncker says “Europe wins”
“The solution we reached is good news for Greece, because, with our choice of the kind of instrument that we will put in place to come to its aid, the financial markets know that Greece will not be abandoned. Greece is conducting a highly credible budgetary consolidation programme. I do not think that Greece will need support of aid from the Eurogroup,” commented Jean-Claude Juncker after the summit.
“I wasn't very keen on going to the IMF because some, excluding any solution based on euro area support, to make exclusive use of the IMF, something I was totally against. However, the IMF has great experience and skill in assessing budgetary adjustment programmes, which the EU, the ECB, the Commission and the Eurogroup do not have. It's an honourable solution,” the Luxembourg Prime Minister went on. When asked about the details of the mechanism, he said “it would be very dangerous to see heads of state delivering divergent and contradictory interpretations”. He also stressed to his peers on Thursday evening “the need to be very clear in terms of communication”. “Mr Van Rompuy is correct when he says that it is a political text setting up a legal instrument, since we have agreed on the nature of the mechanism to be put in motion if necessary. We haven't set a financial limit, quite simply because we don't know how much will be involved. When I say that there is every likelihood that one third will come from the IMF, and the rest from bilateral aid, it may be understood that the IMF input will not exceed €10-12 billion, and it is more that a little likely that the IMF share will be a third. This is not a political explanation, it is a reading of the financial reality of what is available form each party”. Juncker was somewhat irritated by a question from a journalist who asked if Germany was the winner in this European Council, in that Merkel had got what she wanted. He concluded his press conference by saying, “It's Europe that is the winner. I'm fed up with being at European Councils where there are winners - generally the same ones every time - and where, in the normal way of things there should be losers. Since no one ever has said they have lost, I fail to see who could be the winner. It's not enough to argue before European Councils and to agree during European Councils to able to declare yourself the winner. That's all a bit juvenile”.
Brown satisfied with agreement that affects only euro area
The agreement reached in the eurogroup demonstrates the path to be followed by the countries of the euro area. It was a source of satisfaction for UK Prime Minister Gordon Brown, who wanted to “reassure people in the UK: we are not contributing directly to it”. No one had asked the UK for any bilateral support, he stated. Speaking about the (anecdotic?) linguistic difference between the French and English versions of the euro area declaration, Brown held by the form that speaks of enhancing “economic governance”. The declaration “doesn't talk about economic governance”, he said. With all 27 member states being part of the working group which will consider how to strengthen the framework for crisis resolution, “we will be able to put forward out views,” he said, noting that he was against any in institutional procedures in the coming years.
Portugal is not Greece, Socrates points out
Portuguese Prime Minister José Socrates said that the compromise on Greece was important for euro area stability. “We have sent a clear message to the markets: there is no reason to speculate against Greece,” he said after the European Council on Friday. Socrates said everything had to be done to “ensure that Greek citizens pay fair interest and not speculation interest rates”. When asked by press, he rejected any comparison between his own country and Greece. Such a comparison would be “abusive and against the facts,” he said. He went on to say that the Portuguese government “was expecting” the decision by Fitch, the rating agency that has just reduced Portugal's sovereign debt rating. “It's very natural. We are at the same level as Italy and Ireland. It's a very natural level,” Socrates said. He noted that, in its report, the agency had been positive in its assessment of the Portuguese stability programme.
Could the Greek agreement be transposed to other countries, especially Portugal?
When asked whether the agreement on Greece could be used for other countries, in particular Portugal, Yves Leterme said, “The question is irrelevant. That there is European solidarity towards Greece is a general approach. We are defending the euro area. Everybody has faced great economic turbulence. It's very important that decision makers want a single definition of this solidarity. We have to see if it is necessary to call on this mechanism. I believe that, within the terms of the treaty, it's the right mechanism.”
Jan Peter Balkenende is please with how things have turned out
Jan Peter Balkenende, who was the first to argue in favour of IMF intervention, welcomed the decision taken on Thursday by the leaders of the eurozone. “You convinced Angela Merkel, who herself convinced Sarkozy and everyone else”, a journalist commented to him. Acquiescing with a smile, the Dutch prime minister said: “Yes, it was precisely that”. (A.B./H.B./A.By./L.C./B.C./E.H./A.N.)