Following a principle agreement between France and Germany yesterday afternoon, eurozone leaders last night agreed on a rescue deal for Greece in the event of “very serious difficulties”, which will consist of assistance from the IMF and bilateral loans from eurozone member states. The assistance would require unanimous approval from eurozone members and be “based on an assessment by the European Commission and the European Central Bank” that such help was a “last resort”. French President Nicolas Sarkozy said of the estimated €20-22bn funding needed, the proportion of funding would be one-third IMF and two-thirds eurozone.
Greek deficit follies
Greece is sitting on debts that are expected to hit 290 billion euro this year and has a budget deficit of 12.7% of gross domestic product, more than four times the EU limit. The cost of servicing that debt has risen, hitting the euro currency and prompting speculation over a bailout plan. On 3 March, Greece unveiled a draconian €4.8 bn austerity programme targeted at civil servants, the rich and the church in a move designed to secure European help in tackling its crippling debt burden.
Greece needs to refinance €25 billion of debt in April and May. This would mean that the eurozone would provide €15bn and the IMF the remaining €10bn. The amount provided by each eurozone member would be determined by its share in the total capital of the European Central Bank.
In search of a European compromise
Faced with the possibility of seeing a eurozone member default on its debt, leaders were called upon to find a compromise amid sometimes conflicting demands. Ahead of regional elections in May, Merkel had to show taxpayers that the country would refuse to finance Greece’s budgetary indiscipline. Polls in Germany show that voters are strongly against such a move. On the other side, the majority of eurozone countries and the European Commission had insisted that the bloc needed to show its ability to solve its own problems. Turning massively to the IMF – whose main source of funding is Washington – to solve an internal issue would have damaged the bloc’s image and laid bare its deficiencies to global financial markets.
An unpopular deal
According to a survey of German, French, Italian, Spanish and UK voters published yesterday by the French Institut Français d’Opinion Publique, 58% of respondents disagreed with bailing out Greece. 22% of voters in the UK; 24% of voters in Germany; 53% of voters in France; 55% of voters in Spain; and 67% of voters in Italy agreed with the bailout. Two-thirds of respondents were also against the “creation of a European tax” to help member states in the grip of a serious crisis.
Chinese Central Bank Governor Zhu Min has said, “I do not think that Greece will go bankrupt because it is [a country] of relatively modest size… Greece is one case, but it is only the tip of the iceberg. The main preoccupation today is evidently Spain and Italy”.
Integrated European “economic governance” on the agenda
Sarkozy said he secured agreement from other eurozone leaders to discuss economic governance with the European Council becoming the “real economic government of the eurozone”.
The French president said that a working group would look at economic government, including discussing possible sanctions for countries that break eurozone rules. Sarkozy said this could include ideas such as depriving countries of voting rights in the Council of Ministers. “These are potential elements which will be subject of discussions among us,” he said.