Eurozone leaders may be looking towards Athens’ Parthenon for wisdom but at the back of their minds they will have Rome’s Colosseum today as Europe struggles in its fight with jittery markets.
The ancient Greek goddess Athena was revered for her wisdom and it is her inspiration that eurozone leaders will seek today as they discuss a second bailout package for Greece at an emergency summit in Brussels.
Just over a year after agreeing on a €110 billion bailout package to shore up Greece, the first victim of the sovereign debt crisis, eurozone leaders are being forced back to the drawing board.
The severe austerity measures approved by the Greek government have not been enough to calm jittery markets, leading to higher debt-servicing costs and the possibility of Greece defaulting on its loan commitments.
The size of the bailout package under consideration now is likely to be similar to the one approved in May last year but eurozone leaders are unclear about a solution that will not only save Greece but also avert the sovereign debt crisis spreading to other eurozone countries.
While Athens is the immediate problem on the mindinsert all texs of eurozone leaders, the market tremors that shook Rome over the past week will weigh heavily at the back of their minds.
After Greece faltered last year, Ireland and Portugal followed suit as the countries grappled with high deficits and crippling debt. The bad news was sugared by the fact that the Greek, Irish and Portuguese economies are small in relation to the total output of the eurozone.
However, the story risks taking an ugly twist if Spain and Italy default because they are Europe’s fourth and third largest economies respectively. Contagion is the buzzword in financial circles.
Last week, Italy moved quickly to quell the markets by approving an austerity package worth €48 billion with the more controversial measure being a new payment on public health services. The markets were not acquiesced by the swift action and the cost of Italian debt kept rising, sparking widespread concern that Italy might default.
But according to economist Lawrence Zammit the tremors that continue to shake Italy are caused by market speculators. “It is evident that Italy, possibly like Ireland, was a case of an attack by speculators. It does not make sense after the package was approved with relative ease for the markets to respond negatively,” Mr Zammit says. Eurozone leaders cannot continue approaching the situation the way they have been doing the past year, he adds, insisting that concrete action should be taken to curb market speculators.
It is a feeling partly shared by Labour MEP Edward Scicluna, the vice president of the European Parliament’s Committee on Economic and Monetary Affairs.
He says the behavioural psychology of herds and their instinct is now more apt than economics in Italy’s case and nobody can tell where it will lead to.
“Italy’s debt ratio has been over 100 per cent for many years. Nobody batted an eyelid then. Why are we getting jittery today? It is a behaviour associated with the herd instinct,” he says, noting, however, that markets are also not easily duped by austerity packages that do not deliver real economic reform with structural changes to the system.
Finding a solution to the problem will not be easy and German Chancellor Angela Merkel has played down expectations of extraordinary solutions in today’s emergency summit.
Prof. Scicluna believes the series of quick-fix solutions that eurozone leaders have come up with until now and which do not seem to work beyond a limited time period are a symptom of underlying political problems.
He says that voters in Germany and other northern countries are not allowing their political leaders to suggest remedies that entail “some act of solidarity with the countries in crises”. Ms Merkel is faced with a chest of drawers, he adds, each with a specific remedy and which she is only allowed to open one at a time, every time there is a new crisis.
“This allows her to sell the increasing dose of solidarity to her domestic voters,” Prof. Scicluna says.
A solution proposed by former Italian Prime Minister Giuliano Amato is the introduction of euro bonds by which the sovereign debt of problematic countries is guaranteed without dishing out taxpayers’ money. He also cautions that pouring money into Greece and forcing it to take austerity measures in a short period of time may be completely useless if the country is left in the hands of the market.
Speaking in Malta last week, Prof. Amato said euro bonds guaranteeing significant parts of Greek debt will lead to lower interest rates because the markets will be facing the whole of the EU and not just one country. However, Finance Minister Tonio Fenech believes new European legislation, known as the Six-Pack, should provide the necessary impetus to help Europe get on the right track.
The legislative framework caters for stronger corrective measures in cases of excessive deficits, debts and macro-imbalances and suggests coordinated efforts to support competitiveness and generate growth.
“This will help avoid any further contagion among member states,” Mr Fenech says.
As eurozone leaders try to hammer out another bailout package for Greece, the situation remains fluid but for Mr Zammit one thing is certain: Eurozone countries no longer have to strive to reduce their deficit but over the medium term have to aim for balanced budgets instead.