These are momentous developments. Nevertheless, their impact may result in only a miniscule change in policy-making. There are four reasons why.
The first is historical. The formation of the European Union ended hundreds of years of fighting between European countries which culminated in the two world wars of the last century. Even Germans are reluctant to break up the Union. There is a shame-faced recognition that a much poorer Greece was dragged into a Union of sophisticated, developed nations in 1981, despite being geographically separated by a thousand miles, because it was the only non-communist country in the Balkans. Reports such as one by Nick Dunbar on BBC Newsnight in 2004, exposed the fact that investment bank Goldman Sachs helped Greece hide its €2.8 billion debt by using currency swap agreements with dollars and yen, deferring its liability for 10 years just to meet the Maastricht Treaty criteria. In their eagerness to have Greece join the Euro-zone at the time, European institutions such as Eurostat, responsible for maintaining statistical data for the EU, turned a blind eye to this deceit.
Second, being part of the EU also means adhering to the rules. No provisions exist in the EU treaties for a country to be forced out of the union; countries have to voluntarily exit. At this time, all Greek political parties including Syrizia are pledged to stay in the Union. There is little patience to re-negotiate existing agreements as each one has to be ratified by the 17 member nations of the Euro-zone.
Third, election cycles occur more frequently than the time required for austerity measures to take effect or for any of the 15-year bail-out loans to conclude. That means austerity measures must be accompanied by some optimistic boosters so politicians can be motivated enough to sell them to their constituents.
Greek leaders understand this; they voiced their concerns even during the last bail-out agreement in February 2012. George Papandreou, president of PASOK, wrote to the leaders of the powerful institutional troikia – the International Monetary Fund, the EU commission and the European Central Bank – requesting growth measures for investments in green energy grids, broadband transportation, education and innovation. But no such incentives to support these were included in the agreement, barring a weakly financed Hellenic fund for entrepreneurship called ETEAN.
Lastly, European voters are increasingly becoming confused and impatient with the way the bail-out agreements are structured. First, the international private sector holders of Greek bonds took a haircut of 53.5% on the nominal value of their investments, reducing debt by €107 billion. Then €93.5 billion was issued for the bailout. Of this, €30 billion was kept to pay the same international private sector bondholders for their reduced, remaining investment; €5.5 billion was reserved to pay interest on those same outstanding bonds; €35 billion was reserved to support new bonds issued and guaranteed by the Greek government in global capital markets. The remnants were to assist in capitalizing the Greek banking system in case of a liquidity crisis. To ordinary people, this sounded more like the complex but sugar-coated bailouts given to Wall Street banks, while they were stuck with living through the hard times without any direct benefit from the bail-outs.
In other words, in the near future, Greece will stay in the Euro-zone, the bail-out agreement will not be renegotiated, the harsh austerity measures are unlikely to accommodate local politicians’ electoral compulsions, and the financing is likely to stay as complex and disconnected to ordinary lives as they currently are.
There’s not much wiggle room here; at most EU administrators can consider two options. First, highlight improvements, to keep the momentum of the current austerity programme going. For instance, Greece’s legendary bureaucratic bottlenecks and regulatory and legal framework, currently considered one of the worst in the EU, are becoming more efficient. Ditto with its increased digitization of healthcare systems, introduction of generic drugs and reduction of overtime pay.
Second, enable growth by expanding the mission of the €60 billion Co-Investment Fund (CIF) and European Investment Bank (EIB). Currently, they are limited to investing in sovereign bonds and infrastructure projects only. They could extend funding to lenders familiar with local markets who could invest in employment generating businesses, making EU money visible on the ground.
This then, can be the new “growth pact” where European leaders show their constituents a win-all agreement, and there is less hand-wringing over austerity or lack of progress.
Neelam Deo is India’s former ambassador to Denmark and Ivory Coast, and served in Washington and New York. She is the director and co-founder of Gateway House: Indian Council on Global Relations.
Akshay Mathur is Head of Research at Gateway House.
This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.
For interview requests with the author, or for permission to republish, please contact email@example.com.
© Copyright 2012 Gateway House: Indian Council on Global Relations. All rights reserved. Any unauthorized copying or reproduction is strictly prohibited.