Greece and the EU

From the beginning, I thought that the EU would bail out Greece. To that end, I even joked with friends that we should buy Greek debt since the EU would be sure to have it paid. Finance ministers recently announced that the EU would provide Greece with 30 billion euros at a below-market rate of 5%. I didn't think the EU would let the IMF get involved, but the IMF has offered an additional 15 billion euros. Angela Merkel probably wasn't too happy with the EU bailout and paved the way for the IMF to enter the stage.

However, I just read an interesting post on a NY Times blog at http://economix.blogs.nytimes.com/2010/04/15/the-next-global-problem-portugal. A quote from the blog post "While these nations delay, the European Union with its bailout programs — assisted by Jean-Claude Trichet’s European Central Bank — provides financing. The governments issue bonds; European commercial banks buy them and then deposit these at the European Central Bank as collateral for freshly printed money. The bank has become the silent facilitator of profligate spending in the euro zone."

The post argues that there's no reason for EU member states such as Greece, Portugal, or Ireland to be fiscally responsible. They know that the EU, either through the ECB or below-market rate fiscal transfers, will bail them out. The ECB had a means to tighten this loophole by restricting collateral requirements, but it recently made it easier to post sovereign debt as collateral. By using it as collateral, more money is fed into the system, on little to no real basis.

A speaker in our World Studies class said that this crisis will either split apart the EU, through the creation of exit mechanisms for non-performing member states, or will force it closer together, through the creation of more liquid fiscal transfers. At least in the immediate term, it's going down the latter route. Of course, at some point, well-performing member states like Germany will get upset and refuse to stop funding such fiscal transfers. This conclusion, supported by the blog post, says that with the increasing debt, eventually one of the member states will be forced to default, exit the EU, or both. My view is that the EU's bailout of Greece is necessary but that it must either create strict enforcement of the Growth and Stability Pact or be willing to accept fiscal integration to the extent of the US system. I think the former is more likely, but obviously, it's much, much easier said than done. Anyway, I'm not an authority on these matters by any stretch of the imagination, but I just wanted to get my thoughts down. But read the NY Times blog post.