Bill Jamieson: Greek tragedy exposes myths of Euro leaders

Published on Saturday 13 February 2010 12:39

LOOKING at the miserable growth numbers out late last week for the Eurozone it is impossible to suppress a most malign thought.

Perhaps the Greek debt crisis has done the whole of the Eurozone a favour. It has brought the euro down to earth, improved prospects for business and made the single currency zone more attractively priced for inward investment.

Last week the euro fell to a new nine month low against the dollar. It struck a decade low against the Australian dollar and plumbed its lowest against the Swedish and Norwegian currencies since late 2008.

There can't be a German or French manufacturing exporter who is not quietly cheering the tumble of the euro – their most potent but suppressed wish for years. Their exhortations to the European Central Bank have fallen on deaf ears. But a full blown Greek drama, with the threat of a default on government bonds? Breakthrough! Greece has done them a bigger favour in a few weeks than the big business organisations in France and Germany have achieved in years.

It's now clear that the Eurozone is not enjoying a robust, linear recovery as had been hoped when the big economies came out of recession in the middle of last year. According to preliminary figures last Friday, GDP growth across the Eurozone slowed to just 0.1 per cent in the final three months of 2009. This compares with a 0.4 per cent rate of growth recorded in the third quarter.

Output across the larger 27 member European Union – the bit we're in – also slowed to 0.1 per cent from 0.3 per cent in the third quarter.

The slowdown is a big disappointment. And the figures highlight another feature that the European Commission would be keen to deny. Far from the single currency having brought a convergence in economic performance, the latest picture shows just how divergent this single currency zone continues to be.

The marked slowdown in the final quarter was largely due to the German economy stagnating and Italy contracting anew. By contrast, French GDP growth accelerated to 0.6 per cent quarter-on-quarter.

This was a clear change of fortune for Germany, considering that it had led the Eurozone out of recession with growth of 0.7 per cent quarter-on-quarter in the July to September period and 0.4 per cent in April to June. In addition, Italy suffered renewed contraction of 0.2 per cent quarter-on-quarter. And while the French numbers look good on first reading, they were helped by favourable stocks developments and the car scrappage scheme lifting consumer spending.

As for Greece, its recession deepened in the fourth quarter, adding to its woes, while Portugal's economy stagnated. Spain remained in recession but at least its rate of contraction slowed to just 0.1 per cent quarter-on-quarter.

The worry for the Euro zone overall is that such growth as there was in the fourth quarter owed much to government spending, reflecting ongoing fiscal stimulus. Consumer spending, while it may have grown in France, is unlikely to have contributed much to Eurozone growth and could even have been negative given that Eurozone retail sales contracted by 0.2 per cent quarter-on-quarter. And investment is likely to have contracted for a seventh consecutive quarter.

If this is the state of the group that is to come to the rescue of crisis-struck southern members, it does not bode well. Indeed it is hard to decide which is the more fantastical: a set of Greek government accounts or the attempt by European Union leaders last Thursday to deal with the Greek crisis by resort to rhetorical bluster. A meeting of EU finance ministers is now set for this week.

Europe seems to have learnt nothing from the US crisis of 18 months ago that lofty statements of wellbeing just do not cut itif market confidence is to be restored.

A continuing feature of the address of EU leaders to convulsions in markets is the belief that they are the masters of the situation and that a few words from them will bring unco-operative "Anglo Saxon" markets to heel. But it is the markets that have the power, not the politicians. Hence the futility of statements such as that of Merkel and Sarkozy that they had delivered "a clear political signal".

But how are the Greeks expected to live on a diet of political rhetoric? The euro fell further on Friday and yield spreads between German and Greek government bonds continued to widen. These trends are set to continue until some actual, concrete, specific measures are announced and action is taken.

The whole Euro project has been founded on a belief that finance ministers could assert their will by proclamation. But as Stephen Lewis, economist at Monument Securities points out, in seeking to project themselves as masters of the economy, Euro leaders are trying to call the markets' bluff.

Official sources indicated that the Eurozone may discuss specific financial support measures for Greece this week but will not reveal any details. If there is a surer way to fuel market uncertainty and apprehension it is hard to think of one.

Says Lewis: "It seems likely that a strategy that depends for its success on intimidation will, sooner or later, have to reveal the true nature of the threat to those who would already speculate against the Eurozone's continuing stability. It will then be revealed whether the Eurozone authorities are really united and flexible enough to carry through effective action."

With Greece deeply indebted and few willing or able to step up with a bail-out, this crisis has exposed a fundamental weakness among the 16 countries that share the euro. There is no single authority or common purpose to make the single currency more than a cosmetic exercise.

By offering Greece little more than moral support as it struggles to rein in a runaway deficit and impose severe austerity measures, the EU can at best only slow the market contagion, not cure it.

As a result, it could force Europe, already in a winter of growing discontent, to reconsider how much of a union it really wishes to be. Its spending rules – limiting deficits to 3 percent of economic output – have turned out to be inconvenient fictions. How was Greece allowed to get away with entry when it faked budget numbers for years? Who pays if someone defaults? If countries that obey the rules pay for those that don't, won't others misbehave? And above all, what store can be put by a currency whose founding treaty contains both a clause prohibiting bail-outs and one permitting them?

If the answers mean moving authority from national capitals to the EU executive in Brussels, will voters approve of that? It was through denials of exactly this outcome that governments were able to persuade reluctant voters to go along with successive EU treaties. Greece has arguably done the EU a bigger favour by exposing these deeply uncomfortable truths.