Europe’s leaders hammered out an agreement on government budgets at their latest summit last Monday. All EU countries bar Britain and the Czech Republic have agreed to limit structural budget deficits to 0.5% in future and lower public debt to 60% of GDP. Tension between Germany and Greece deepened when German officials floated the idea of placing the Greek government under an EU budget commissioner to ensure it sticks to its austerity programme.
What the commentators said
You can see why the Germans want to impose an EU bureaucrat on Greece, said Jeremy Warner on Telegraph.co.uk. “Greece lied its way into the single currency, and it has repeatedly failed to keep its promises since”, even after agreeing to various measures with the EU and the International Monetary Fund (IMF) in return for loans. “You don’t keep lending to a perpetually delinquent creditor.”
Still, “even the lash of the German gauleiter” wouldn’t address the basic problem. Greece is in a “vicious circle” as austerity undermines growth and the government budget, making the debt pile even bigger.
And now Spain is “staring at a particularly vicious version” of this “austerity spiral”, said Hugo Dixon on Breakingviews. The programme agreed with the EU foresees the budget deficit falling from 8% last year to 4.4% in 2012. That would be a tall order at the best of times.
But with GDP already shrinking and unemployment at 23%, it is “suicidal”. In return for its efforts on structural reform, the government should be allowed “a little longer” to get its deficit under control. Now, thanks to the fiscal compact, the whole continent appears to be heading for a potential debt spiral, as Economist.com pointed out.
In good times, the pact could be a “useful discipline”; in bad, it would just make things worse – if countries stick to it. Given the potential loopholes it’s no wonder a member of the European parliament called it “useless”.
In the meantime, more important immediate issues were ignored at the summit, said Economist.com: the fate of Greece and the development of the eurozone rescue fund. The European Central Bank’s (ECB) three-year loans to banks have eased strains in the interbank market and prevented a Lehman’s style banking collapse, but it has hardly reversed the credit crunch, as Jefferies Fixed Income pointed out.
Lending fell in December. So worries that a shrinking eurozone economy will make the debt problem worse are hardly likely to disappear. The ECB’s liquidity injection has prevented “a heart attack”, said Martin Wolf in the FT. But the eurozone is “stuck on life support”.