Statement On Greece From EU Summit

Statement On Greece From EU Summit

Click here for the full Note and disclosures.

Going into today's summit meeting, EU heads of state faced a difficult balancing act. On the one hand, they wanted to calm financial markets in order to limit further stress, not only on Greece, but also on other sovereigns in the region and on holders of sovereign debt (especially financial institutions). But, on the other hand, they wanted to keep the pressure on Greece to make an appropriate fiscal adjustment, which will clearly be painful in macroeconomic terms. Whether the statement achieves both of these objectives remains to be seen.

The widening of spreads in recent weeks has to be related in some sense to a perception of an increased risk of default or debt restructuring. Given the "no bailout" spirit of the Maastricht Treaty, embodied now in Article 125 of the Lisbon Treaty, the question of whether a sovereign within the Euro area would be allowed to default is somewhat unclear from the perspective of the key constitutional document covering the economic governance of the region. Throughout this crisis, we have argued that political and financial support would be forthcoming, if needed, but presumably not everyone was convinced. In order to provide some reassurance on this issue, today's statement says "Euro area member states will take determined and co-ordinated action, if needed, to safeguard financial stability in the Euro area as a whole". This still leaves the position of Greece somewhat ambiguous, but EU heads of state are making it clear that, to the extent that the Greek stress spills over to other countries or to financial institutions, action will be taken. Exactly what that action will be is not specified.

Regarding the Greek fiscal adjustment, in today's statement EU leaders "call on the Greek government to implement all the measures in a rigorous and determined manner to effectively reduce the budgetary deficit by 4% in 2010". EU heads of state say that additional measures will need to be adopted if necessary to ensure that the ambitious budget targets in the stability program are met. Moreover, "the Commission will closely monitor the implementation of the recommendations in liaison with the ECB and will propose needed additional measures, drawing on the expertise of the IMF". The reference to the IMF in this statement is interesting, in the light of the widespread view that EU politicians were reluctant to involve the IMF. At this stage, it looks like it is just the expertise of the IMF which will be drawn upon, rather than its financial resources. That could of course change down the road.

Following this statement, EU leaders hope that financial markets will calm down and allow Greece to both access capital markets and get on with its fiscal tightening without needing to worry unduly about financial market pressure. If these hopes are not realised, and either Greece experiences a genuine liquidity crisis, or financial stress spreads more broadly, an explicit package of measures will be implemented, which would likely include loans, credit lines and guarantees to those sovereigns and financial institutions that needed them. We doubt that anything will be clarified regarding this unless it is actually needed.

Aside from the liquidity risk for the Greek government, the other key risk in Greece is implementation. Apparently, the rest of the region is somewhat frustrated at the slow progress of implementation of the budget measures in Greece. It is not clear why things are moving so slowly. Although public sector workers are on strike, the Greek government has broad based political support and support from the majority of the population. Indeed, as we understand it, the Greek population accepts the need for tough fiscal medicine.

Ecofin, the council of finance ministers, meets next week on February 16th. It is hard to see how they will add anything to today's statement, although they will adopt the recommendations that the European Commission made last week. The next key date after that is March 16th, when the Greek government has to submit a report to the European Commission laying out the implementation of the 2010 budget measures.

The full statement from the EU summit:

Statement By The Heads Of State Or Government Of The European Union

All euro area members must conduct sound national policies in line with the agreed rules. They have a shared responsibility for the economic and financial stability in the area.

In this context, we fully support the efforts of the Greek government and their commitment to do whatever is necessary, including adopting additional measures to ensure that the ambitious targets set in the stability programme for 2010 and the following years are met. We call on the Greek government to implement all these measures in a rigorous and determined manner to effectively reduce the budgetary deficit by 4% in 2010.

We invite the Ecofin Council to adopt at its meeting of the 16th of February the recommendations to Greece based on the Commission's proposal and the additional measures Greece has announced.

The Commission will closely monitor the implementation of the recommendations in liaison with the ECB and will propose needed additional measures, drawing on the expertise of the IMF. A first assessment will be done in March.

Euro area Member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole. The Greek government has not requested any financial support.

ENDS

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