Wednesday, February 10, 2010

Greece needs a tide-over loan from the rest of the EU – not free-market fundamentalism

and harsh budget cuts there could stall economic recovery in Greece and across the EU

Strikers in Greece demonstrate against public pay freezes and public spending cuts imposed by the Greek government due to pressure from the EU and currency speculators targeting the Euro. (Photo by Petros Giannakouris/Associated Press)

With the EU currently enforcing big cuts on the Papandreou government in Greece there’s a serious risk of turning recession there into depression – and of it spreading across the EU. Sacking lots of public sector workers or cutting their pay is not going to help end the recession – and those economic problems wouldn’t just affect Greece, but the entire EU, which trades with it. What’s more the cuts may well not end currency speculation on the Euro – if they create a depression they might increase it and create another recession across the EU just when it’s economy is starting to recover.

There’s also a risk of forcing Greece to leave the Euro, as the majority of Greeks won’t back these kind of extreme cuts or the kind of economic depression likely to be caused by them.

As Nobel prize winning economist Joseph Stiglitz points out there is no danger of Greece defaulting on it’s debts and it’s government does not have significantly higher debts as a proportion of it’s GDP than the big three in the EU – Britain, France and Germany. Stiglitz also points out that France has broken EU rules on debt exceeding 3% of GDP without having the same scale of cuts enforced on it – and that a large part of the problem is speculation in currency markets on the Euro. He also points out that Greece is in no worse a position economically than the US is currently (1).

Stiglitz has also compared the speculators’ attack on the Euro to that on the pound in 1992 and on Asian currencies in the 1997 Asian financial crisis (2). The solution, he says, is for the rest of the EU to come to Greece’s assistance to ensure the speculators’ gamble doesn’t pay off and avoid a deeper recession which would also damage market confidence, possibly by changing interest rates on the loans and intervening in the stock market (3).

Update - 11th February 7p.m.:

The EU seems to have decided that their ‘aid package’ to Greece will amount to a statement saying they back the Greek government, some vague talk of ‘co-ordinated measures to defend the Euro’ and
a demand that Greek budget cuts continue, along with a suggestion that Greece go to the IMF for money. The IMF might have changed its spots, but has a history of making its loans conditional on privatisation and public spending cuts. There have been suggestions that the EU statement might mean low interest loans provided jointly by the EU and the IMF, which would be slightly more hopeful, but no-one has confirmed this (1). (4).

No wonder the speculators don’t seem to be deterred.

The EU needs to provide concrete help to Greece, possibly by new low interest loans or grants - and stop demanding budget cuts on a scale that the British, German and French governments would rightly never consider in their own countries - particularly during a recession.

(1) = 25 jan 2010 ‘A principled Europe would not leave Greece to bleed’,

(2) = Telegraph 08 Feb 2010 ‘Greek crisis intensifies as Joe Stiglitz calls for Europe to 'teach the speculators a lesson'’,

(3) = BBC News 03 Feb 2010 ‘Joseph Stiglitz on Greece: 'Speculators pose risk'’,

(4) = 11 Feb 2010 ‘EU leaders reach Greek bailout deal’,

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