European Union’s position concerning Greece

Scris de Maria Constantin

Greece, which at the moment faces huge debts, estimated at EUR 300 billion, the equivalent of 125% of GDP, must reimburse EUR 30 billion by the end of the year.

Last year, the European Investment Bank (EIB) has increased the volume of the loans granted to Greece with 33%, to EUR 1.6 billion from EUR 1.2 billion in 2008, in order to support the economy within the global crisis.

“In Greece, in 2009, the main objective was to support small and medium enterprises and financing capacity was amplified by the synergies created with the majority of large banks in Greece”, declared EIB Vice President, Plutarch Sakellaris.

In 2009, EIB has signed agreements with eight major banks in Greece to support the real economy and reduce the impact of the crisis by facilitating the financing for SMEs.

Within the increasingly acute crisis recorded in 2010 in Greece, in March, the Greek Prime Minister George Papandreou called on the partners in the euro zone to help Greece reduce loan costs, insisting that he doesn’t ask for help from the European taxpayers and that he will not call on the International Monetary Fund (IMF).

“We do not ask money from German, French, Italian or other taxpayers. All we are saying is that we need strong political support to make the necessary reforms and to ensure that we do not pay more than necessary to implement them”, declared Papandreou during a speech addressed to the European Parliament.

Greece is not left alone during hard times

In March, the European finance ministers agreed to financially support Greece during this difficult period. They have agreed on technical details of the financial support plan for Greece, mechanism based on bilateral loans.

Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF) has also came to Greece’s aid, by expressing his solidarity with the financial aid applications made by Greece, which is now faced with an unprecedented budget crisis. “We are ready to act rapidly”, declared IMF’s boss.

Greece requested the activation of the salvation mechanism offered by the euro zone countries, as this being the final solution for getting the economy out of the crisis. Moreover, on April 21st, the Greek state began its discussions with representatives from IMF, European Commission and Central European Bank (CEB) to determine the technical details of the support mechanism, in view of obtaining a loan of EUR 30 billion from the EU, at an interest rate of 5% per year and EUR 15 billion from the IMF.

In May, leaders of the 16 states in euro zone have agreed the EUR 11 billion loan for Greece, to prevent the expansion of the financial crisis that the country faces.

With the approval of the EU-IMF assistance package for Greece, the euro zone leaders have pledged to accelerate the plans to reduce deficits. Also, they have tightened EU budget rules, have implemented more effective sanctions for those who violate the rules of debt and have said that they will closely monitor deficit and competitiveness.

In exchange for the three year loan, the Greek state must reduce public expenses. The European Commission’s President, Jose Manuel Barroso declared that Eurogrup will do its best to maintain the financial stability of Greece.

The leaders of euro zone also came with a series of proposals for a European stabilization mechanism for maintaining financial stability, with a value of around EUR 70 billion. They hope that this new mechanism smashes investors’ fears about the possibility of extending the situation in Greece in other countries with high deficits or low economic growth.

This mechanism has sparked strong reactions from the most powerful states. The German Chancellor Angela Merkel said that the mechanism will send “a very clear signal” to discourage speculation on the market. She previously discussed with U.S. President Barack Obama, who called for a “strong political response” from the international community.

The granted financial assistance is unprecedented, and EU leaders hope to eliminate fears that this crisis will spread from one country to another.

“We are fully aware that we face a serious situation in the euro area. It all depends on responsibility and solidarity. We will face this situation” said EU president, Herman Van Rompuy.

The vulnerability of EU Member States

Hoping that it will stop the default of the Greek Government and the European domino which seems to include Portugal, Spain, Italy and Ireland, euro zone’s finance ministers have decided to activate the mechanism of financial support for Greece. Eurogroup has taken the decision a few hours after the Greek government announced a fiscal adjustment program that provides the reduction with EUR 36,4 billion of Greece’s deficit in the next three years. The program has an instalment of three years and sums up EUR 110 billion, of which EUR 80 billion is bilateral aid from Member States of the euro area and EUR 30 billion from the IMF.

“Recent crises and the risk of stability of the euro area have stressed the interdependence between EU Member States and have exposed their vulnerability, especially of those in the euro area”, believes Niculae Idu, Head of European Commission Representation in Romania.

Investors look with scepticism at the evolution of developed economies in the euro area, within the framework of ingravescence of the crisis in Greece but also of the increase in default chances and Portugal and Spain’s failure to timely pay off their debts. The degradation of these countries by rating agencies have determined, in the last month, the widening in the declines of major stock markets in Western Europe, where stock indices remain in the red, compared to the end of 2009.

What investors are considering is that the economic situation of the euro area countries – Greece, Portugal, Spain, Italy, Netherlands, Germany or France – is not simple at all and may have negative repercussions on the long term, upon EU’s economy.

“Yet the lesson should not be that failure has to be avoided at all costs: applied to the case of Greece, this would mean that the pressure on the Greek government to adjust would evaporate. The alternative, instead, is to think ahead and prepare for failure!” thinks Daniel Gros, Director of the Centre for European Policy Studies.

However, urgent measures to counter the recent crisis and the risk in stability of the euro area are imposed. These measures have already been taken by the EU on short, medium and long term through the Europe 2020 strategy. “In order to manage economic interdependence, the Commission has proposed recently to reinforce economic coordination between the Member States. The aim is to strengthen the functioning of the stability and growth pact and to extend surveillance of macroeconomic imbalances. The proposal is to align national budgetary policies within the framework of a coordination mechanism for economic policies, called “European semester”, so that Member States benefit from coordination existing at European level when elaborating own budget drafts and reform programmes”, declared the Head of European Commission Representation in Romania.

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