A
political settlement in Greece for an interim unity government to push through
a second bailout plan for the indebted nation has been hailed as an
achievement.
It is, barely - to the extent that
parliamentary rejection of the €130 billion (US$179 billion) lifeline and the
associated austerity imposed on the Greek people could have consequences for
the mainly European banks holding Greek debt. But part of the bailout package
already includes a 50 per cent writedown of bond debt that, in the end, would
likely be borne partly by taxpayers in the richer European countries, not
wholly by the banks.
Greece is a smallish economy in the European
scheme. It is still being debated whether its departure from the euro zone -
but retaining the perks of membership in the European Union - might not be a
neater solution in that it could devalue its old currency, the drachma, and
work its way back to competitiveness and growth. Debt reduction would follow.
Such a process would take years. What terrors might there be in the meantime?
Markets are rattled and 10-year bonds issued by indebted nations are carrying
punishing rates.
The contagion effect spread by just one
happy-go-lucky Mediterranean economy is an instance of what has become surreal
about the European fiscal quagmire. It is past squabbling whether the single
currency was a good idea; Europe just has to make it work, even if in fits and
starts. The United States and China have different stakes in the outcome, with
China the more nervous because of its euro holdings and the importance of
Europe's export market to its job statistics. With good reason, both nations
were equivocal about buttressing the EU's financial stability mechanism at last
week's Group of 20 discussions in Cannes. China could get involved at some stage
after it has extracted strategic concessions from Europe like technology and
asset sales, and recognition as a market economy to strengthen its hand in
trade disputes.
To be helped, Europe will have to help itself
by showing more resolve than it has in reducing wasteful expenditures and
improve tax collection. Tax fraud in the Mediterranean region has been a way of
life. It could also learn to be lean and competitive again. And it is back to
this part of Europe - in Italy, the euro zone's third-biggest economy - where
damage greater than from a Greek default could result if the fiscal
free-for-all shows no let up. Italy's debt load at €1.9 trillion (nearly six
times that of Greece) would be beyond any lending agency's capacity to cope if
a bailout is required. As in Greece, reforms are demanded, the people resent
the imminent end of the sweet life and the government is shaky. It's all
depressingly familiar.
News Desk
The Straits Times
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