Tuesday, March 13, 2012

Eurozone: Undramatic evening in Brussels

Last night, the Eurogoup gave the political green light for the second Greek bailout package. The final all-clear should come on Wednesday.

An undramatic Eurogroup meeting yesterday night brought Greece again a step closer to the second bailout package. In yesterday’s wording, the Eurogroup “has politically adopted” the second Greek bailout package. The final green light should be given by the deputies of the finance ministers which will meet tomorrow. Now the real work can start. Let’s not forget, the debt restructuring is no substitute for structural reforms and austerity measures. In this context, the growth assumptions underlying the Greek debt sustainability analysis (which brings Greek debt to below 120% of GDP by 2020) remain probably too positive. An average GDP growth rate of 2.5% over a period of six years would make a lot of other Eurozone countries jealous. After the meeting, ECB president Juncker said that Greece would now get a second chance. Will it be the last one?

The Eurogroup also discussed the fiscal situation in Spain. After signing the new fiscal compact, the Spanish government had announced that it would exceed this year’s deficit target. Instead of the official target of 4.4% of GDP, the Spanish government had suggested a new target of 5.8% of GDP. The higher deficit for 2012 was, partly, due to overruns in 2011. Yesterday, the Eurogroup asked for another, front-loaded, fiscal consolidation effort of 0.5% of GDP. Even if this might look like a compromise, Spain still has to bring back its deficit to 3% next year. However, yesterday’s decision shows that the Eurozone is increasingly being torn between the strict-austerity-and-rules-based approach and a more growth-oriented approach.

The undramatic Eurogroup meeting can be seen as a relief but will not be the new reality. The next challenges for Eurozone politicians should be the discussion on how to increase the ESM, whether and when Portugal would need a second bailout package and the next quarterly assessments of Greek austerity measures and structural reforms. Moreover, the discussion on Spain was probably only the tip of the iceberg. In fact, the big institutional litmus test for the Eurozone will come next year when eight Eurozone countries officially have to bring their fiscal deficits back under the 3%-threshold. Except for Germany, most other countries are still far off from reaching this target. So far, only bailout countries had received more time to bring their deficits back in line with the Maastricht-norm. Does this mean more bailouts or softer rules? Stay tuned.

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