This week’s note will begin by reiterating our bullish theme on the Natural Gas market. We hav...
Europe's Greece “Fix” Is a Band-Aid
04/13/2010 9:20 am EST
It’s hard to see how the European finance ministers’ deal with Greece, announced Sunday, fixes the crisis.
Postpones the day of reckoning, sure. News that members of the European Monetary Union (EMU) have agreed to provide up to $41 billion in loans to Greece over the next year will almost certainly allow the country to refinance the $40 billion or so in debt that comes due in 2010. And at a lower 5% rate of interest than the 7.45% the market was demanding on two-year Greek bonds last week
But provide Greece with a long-term path to solvency? No.
The country faces draconian spending cuts and higher taxes that are almost certain to prolong the Greek recession. That will further reduce government revenues and increase the deficit.
The Greek economy is fundamentally uncompetitive in the world right now. If the country wasn’t part of the euro, Greece could depreciate its currency, making its goods cheaper and its industries more competitive. But Greece doesn’t have the option.
That leaves cuts to real wages as the only alternative, and I don’t think Greek politics will let any Greek government deliver the kind of pain to the average Greek worker that this “solution” would require. For more on why the Greek crisis ultimately leads to default, see this recent post.)
Worst of all, this deal makes the fundamental problems in the EMU worse.
The Greek crisis revealed that the union has no bureaucratic mechanism for dealing with this kind of crisis and no political will to tackle the big discrepancy between wealthy and globally competitive northern members such as Germany and poorer and globally uncompetitive members in the south, such as Greece and Spain.
The monetary union is waiting tensely to see what kind of austerity program Spain comes up with to fix a deficit that, at 11.2% for 2009, was only marginally worse than Greece’s 12.7% deficit. (The European Union target is a 3% deficit.)
Spain’s first austerity plan, introduced back in January, was derided by economists and financial markets as inadequate. The proposed cuts in government spending, the near freeze in government hiring, and a few tax increases seemed inadequate to the job at hand. At the same time, the plan immediately ran into opposition from labor unions and Spain’s powerful regional governments. With Spanish unemployment near 20%, it was hard to see how the government could deliver even the plan it proposed.
Will the Greek loan deal make the Spanish government more determined to fix its own problems? Or will it now decide that Spain can count on a loan deal too?
I think you know the answer to that one.
Full disclosure: I don’t own shares of any company mentioned in this post.
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