Thursday, March 25, 2010

Eurozone opens safety net for Greece

Is this now finally it? Yesterday night, Eurozone leaders cut the Gordian knot and came up with a long-awaited "blueprint" for how to deal with the Greek fiscal crisis. The Eurozone countries have presented a package, “involving substantial International Monetary Fund financing and a majority of European financing”. According to the statement Eurozone countries “are ready to contribute to coordinated bilateral loans”. Any financial aid must be an “ultima ratio” which means the aid will only be given if Greece cannot raise enough funds from the markets. According to the Eurozone statement, Eurozone countries would contribute bilateral loans in proportion to their shares in the capital key of the ECB. These loans would be given at market interest rates and not at an average Eurozone rate. The coordinated bilateral loans would have to be agreed unanimously by all Eurozone countries which actually means that Germany (or any other country) could still stop Eurozone aid.

With the now found solution, both France and Germany could limit damage to their public image. The German government could push through its demand to bring the IMF on board, while France can still emphasise the European character of any future aid package to Greece. The two biggest losers of the last days are the European Commission and the ECB which until the very last moment objected against bringing the IMF on board.

Looking ahead, the jury is still out whether the Eurozone's statement will benefit or harm the Eurozone. While some market participants could see the IMF involvement as evidence of incapacity, the long-term impact could be better than some might think. Now the Eurozone has a credible instrument to temporarily bypass the constructional flaws of the European Treaty. The now presented toolbox is probably a better precedent for future cases than any other ad hoc solution. However, it is also obvious that the Eurozone needs to polish up its fiscal framework quickly. Better prevention and a functioning crisis resolution mechanism have become indispensable.

As so often in European decision-making, the way to a solution was messy. However, in the end it is only the results that count. Once the dust has settled, yesterday’s blueprint could prove to be the best solution. Essentially, yesterday's agreement confirms that the Eurozone will not let Greece go down without opening the door for possible future free riders. European solidarity still exits but it does not come for free. Neither for the givers, nor for the takers of this solidarity.

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