European Union checklist for May 2016:
1) Greek Loans Rolled Over (again!)—Check!
2) Crisis Averted (again!)—Check!
3) Structural Problems in Greece Left Unsolved (again!)—Check!
To an outsider, at least, that seems to be a good summary of how the European Union handled the most recent chapter in the Greek debt crisis.
After the latest round of “crisis” negotiations in Brussels this week, the European Union and Greece announced more “extend-and-pretend” stop-gap measures to avert a Greek default. As the Financial Times and Bloomberg reported, the European Union will extend about 11 billion euros from the current bailout fund to stave off default “at least until October” 2016.
Ian Talley in The Wall Street Journal quotes Marc Chandler of Brown Brothers Harriman terming the whole exercise a “paper charade” and saying “the bailout isn’t for Greece, it’s for Europe.”
As Stratos Ramoglou writes at Business Insider, the root causes of the Greek debt crisis were public spending on a “bloated and dysfunctional public sector” that served mainly political clientelism and cronyism, along with the aftershocks of the 2008 global financial crisis on the, “poorly designed European monetary union. It was an accident waiting to happen … ”
In this latest round, officials from the International Monetary Fund at least talked a good game.
As the Financial Times reported, IMF officials “confronted Germany over Greece’s unsustainable debt burden,” issued a “bleak assessment of its financial future,” called for “European creditors to forgo any Greek debt payments until 2040,” and urged long-term debt restructuring. Bottom line: The IMF advised German, French, and other EU banks to take a significant haircut.
Perhaps not surprisingly with the 2017 Bundestag election in Germany around the corner, the IMF got rolled, and the Greek debt problem remains unsolved.
For her part, IMF Managing Director Christine Lagarde managed to keep a low profile during the negotiations with a conveniently scheduled meeting in faraway Kazakhstan.
One silver lining: The IMF’s harder line this time around was prompted in part by congressional Republicans who (at the urging of The Heritage Foundation and other fiscal conservatives) insisted that the IMF’s “exceptional access framework” be reinstated in exchange for their assent to passage last year of the IMF reform package.
That framework prohibits new IMF lending to a country that has unsustainable debt and no realistic plan get out of it. It was abandoned by the IMF in 2010 at the beginning of the Greek crisis.
These latest developments were not reported widely in the U.S., but Americans should take note: The reckless federal government borrowing and spending of the last decade inevitably will lead to the sorts of crises we are seeing in Europe.
No wonder the Obama administration wanted passage of the IMF reform package to provide more IMF money for bailouts.