Europe to Greece’s rescue

Greece is on a very slippery slope. If it were a business it would be on the verge of bankruptcy. And the EU has been tossing up whether to bail it out.

On the plus side, it saves the economy of one of its members and restores confidence in the wavering euro currency. On the negative side, it breaks EU rules and sends a dangerous message to other countries that irresponsibly managed economies will be rescued.

Last week, the EU decided it would proceed with a bail out. Here’s why.

The Greek problem

For decades, the Greek government has suffered from incompetent management of its cash flows.

Apart from some wasteful spending, the main problem is this: Greeks don’t like paying their taxes.

Many Greeks prefer to be paid in cash to avoid declaring their income. Electronic payments are frowned upon. Honest people are considered stupid.

Tax inspectors will gladly accept cash bribes to not go through peoples’ business accounts. So it makes economic sense to pay a cheaper bribe than a legitimate tax bill.

As a result of this cultural tax evasion, Greece’s overall tax revenue is severely depleted, meaning it cannot afford its oversized public sector.

The government’s budget shortfall (deficit) has now reached 12.7% of the country’s entire economy (its GDP) – four times more than ‘eurozone’ rules allow.

So why wasn’t Greece warned before now? Firstly, every country had broken the rule so nobody paid much attention to it anymore. Secondly, the Greek statistics department had manipulated their account figures to hide the true size of the deficit.

Greece now has a huge €300bn debt that if they fail to pay on time would be a major blow to the eurozone (the 16 countries that use the euro currency).

The euro factor

One of the main reasons why Greece joined the euro currency was because it meant money was cheap to borrow. For banks, lending Greece money in the euro currency is less risky because there are no currency fluctuations and the money is useable in 15 other countries.

But the euro has now become the victim. Reports suggest that market speculators have collectively placed a record €5.8bn bet hoping that the Greek crisis will cause a significant fall in the euro.

Foreign exchange traders have subsequently been selling it for fear of losing money through its devaluation.

If Greece defaulted, these speculators would turn their attention to the other struggling (‘PIGS’) countries of Portugal, Ireland and Spain, causing panic in those countries. The euro would then be in serious trouble.

Indeed, some European politicians have accused these speculators of being part of a murky plot to destroy the euro and fight off tougher banking rules.

The rescue plan

EU rules prevent eurozone countries from collectively bailing out Greece, but they’ve decided the risks are too great and are looking for ways around it.

They haven’t unveiled details of how they’ll do it, other than offering vague “solidarity”. Suggestions are that it will come in the form of loan guarantees, fast-tracked EU support funds, or loans from individual countries.

Germany is likely to provide the most assistance because they’re in the strongest position, and also, being the largest economy on the euro currency, they stand to lose the most.

The statement from the EU on Thursday saying it would take “determined and co-ordinated action, if need be” was more about calming the markets (the euro did rise in local markets, but fell again once traders realised it was lacking in actual detail).

The EU says it wants Greece to cut its budget deficit by 4% each year until 2012, but did not specify how.

This statement of support complements an austerity (cost cutting) plan by the Greek government (which maintains it doesn’t actually need EU help).

Their plan includes freezing public sector salaries, replacing only 1 in 5 people leaving government jobs, increasing a range of taxes and a crack down on tax evasion.

As expected, there has been a huge public backlash in Greece over the plan. On top of massive street protests, Greek workers have shut down schools, grounded flights and walked out of hospitals.

This could just be the tip of the iceberg though. Under a new rule from the Lisbon Treaty, the EU can actually take over the running of Greece to cut the deficit.

According to article 121, the EU can change the structure of Greek pensions, healthcare, labour markets and private commerce as a condition to their assistance.

And they would do this with a lot less sympathy as to how Greeks might feel about it than the Greek government.

Finance ministers from all EU countries are meeting in Brussels today and tomorrow to discuss the details of a bailout plan. Greece, Europe and certainly the financial markets will be watching very closely. The future of Greece and the euro is at stake.

By The Casual Truth