The EU bailout of Greece

Yesterday the EU put the finishing touches on its bailout package for the troubled Greek economy.  Key to moving the deal back into the EU court from the IMF court was the involvement of France.  The deal is valued at 22 billion Euro and combines monies from both the EU and the IMF.  However, the IMF has a secondary role in the aid package.

Analysis: While it sounds like Greece is out of the woods, it is not.  The 22 billion Euro package can only be awarded to Greece upon condition that it cannot find financing from the international bond markets.  In other words, this package is a failsafe mechanism only.  The plan still requires Greece to undertake budgetary austerity measures and to seek financing from all other sources first.

These negotiations have been interesting for a number of reasons:

1.  For the first time since World War II Germany has asserted itself politically.  France finally sensed the nature of “the moment” and got involved only at the end of the negotiations.  In the long-run, I am anticipating a competition for EU power between France and Germany, thus ending French dominance of the EU.

2.  Germany bent to the will of its population who were very opposed to bailing out Greece directly.  This means that at the end of the day, Germany’s first priority is Germany, not the EU.  If further tensions erupt in the EU the Union may disintegrate.  When given the chance to unify, not just economically, but politically back in 2005-2006, each EU member voted against political unification.  That means that the EU remains a weak economic confederation and not a competitor to U.S. hegemony.

3.  The EU has been exposed for what it is: a weak economic confederation and not a competitor to U.S. hegemony.  Primarily, the vulnerability of the EU has been highlighted by its continued inability to deal with homegrown crises.  First there was the war in former Yugoslavia which the EU couldn’t handle.  Ultimately, the EU had to realize its limitations of power, swallow its pride, and ask for United Nations and United States help.  In the current economic crisis the EU had to scramble to aid one of its smallest members and had to involve the IMF (largely a U.S. foreign policy shill).  Not only that, but the EU charter never had any built in mechanism for dealing with a member’s economic problems.  Further, during the Greek crisis it was learned that Greece lied about the health of its economy in order to gain admission to the EU.  But alas, there is no auditing mechanism in place to confirm the health of a nation’s economy – it’s on the honor system.  In other words, the EU has sham authority.

4.  The Greek crisis is the tip of the iceberg in terms of European economic crisis.  There remain three other nations in big trouble: Portugal, Italy and Spain.  Each of these nations is approaching their own economic cliffs.  How will each of these nations respond to their own crises?  How will the international debt markets respond?  How will the EU respond?  The plan put in place yesterday does seem to lay the groundwork for future EU member economic crises.  However, that groundwork basically says, “You are on your own.  If that fails, we might bail you out.”

5.  The effect on the Euro.  Because the EU has been exposed as a powerful free-trade zone, but weak political body, the Euro has taken a hit.  It’s my feeling that the Euro is likely weaker against the dollar going forward, and for many years.

Importance grade: 8; the international financial markets were tracking this event very closely.  The storm clouds seemed to have passed.  However, meaningful policy was not established, so the EU remains a weak institution with two dominant players: Germany and France.  The health of the EU going forward will exactly correlate with the degree of cooperation that exists between those two nations.  If there is any fracturing, which is likely, then the EU is a sham.

I will continue to track this issue closely.

Jason