Currency markets have been fretting. “Europe cannot get its act together on Greece,” says Bank of America Merrill Lynch. Last week Greece said its high borrowing costs were making it difficult to cut its deficit and it may therefore have to turn to the IMF for help.
While Europe is split over whether the IMF or the EU should take the lead in arranging a support package for Greece, Germany has dug in its heels.
Chancellor Angela Merkel, with an eye on forthcoming state elections, has said that “help is not on the agenda”. She called for a eurozone mechanism to expel a financially undisciplined member. Early this week, Germany said any rescue package could only be offered if Greece could no longer raise money on the international markets.
Further, the IMF must be involved and eurozone members must agree tough new rules to control debt and deficits and thus prevent another debt crisis. That might mean changing EU treaties.
But whatever ultimately happens to any support package, the Greek drama is unlikely to end soon, as Steve Barrow of Standard Bank warns. The danger is that austerity measures will exacerbate the downturn, making it even harder for Greece to meet its fiscal targets. The Bank of Greece has just warned of such a “vicious circle”.
It also said the fall in growth this year is likely to be 2% rather than the 1.7% assumed by the government. There’s uncertainty too over the rest of the periphery and even the long-term sustainability of monetary union. Standard Bank, therefore, sees the euro, now at $1.35, heading for $1.25. And possibly “quite soon”.