First we are told that providing a new loan to Greece, or Ireland, or Portugal, creates a line in the sand, prevents the contagion spreading. As each sucessive loan demand showed, that did not work. The incoming tide of debt erased the lines. The contagion spread. The mixed metaphors were too weak to face the facts.
Then we are told a loan package for a troubled country will be linked to tax rises and spending cuts which will sort the problems out. In the case of Ireland it emerged that the banks needed another E24 billion to satisfy the incoming government. In the case of Spain they are putting sums into their banks at risk which the market fears will still not be enough.
A loan package from the EU and IMF achieves two things. It firstly offers the country subsidised credit compared to market rates. That’s why they ask to borrow, as they are finding it too dear and difficult to borrow in the normal way. The subsidy is paid by the lending countries. Secondly, it claims to offer a policy change which will curb the deficit, mend the banks and put the economy onto the right course.
Such a policy change, if convincing, would remove the need for the subsidised loan. If the markets believed that the country concerned was taking sufficient action to curb its deficit or mend its banks, then that country would be able to borrow in the market again at sensible rates. If the market is not persuaded, then we need to ask why the IMF and EU do not insist on deficit reduction measures that carry conviction. The interest rate on Greek and Irish debt did not subside to more normal levels once the policy changes demanded by the lenders were announced.
It is possible the markets are wrong and the EU is right. As taxpayers contributing to this folly it would be good if for once they were. The markets are concerned that the policy changes do not allow more rapid growth in the damaged economies. Without decent growth deficit reduction is a far more painful process. Tax rises can result in lower revenues. Business investment and new jobs can be diverted elsewhere. With no devaluation countries locked into the Euro can find it difficult to export their way out of trouble. There are conditions when locked into the Euro when countries can be forced into round after round of tax rises and spending cuts if growth does not come through to ease the pain.
I would recommend strongly that instead of sitting down and discussing the terms of a bail out loan, the EU should discuss with Euro members the terms of that country’s new economic policy designed to restore market confidence. It is a matter of general Euro area concern, as the European Central Bank stands behind them all. Only if they re-establish market confidence can these countries be sure of a better future.
Meanwhile, it would be helpful to have a statement from the European central Bank about how much state debt from Euro members it is prepared to buy, and how much support it can give to Euroland area banks. There is a danger the ECB could build up very large positions in the weaker countries and banks. Then one day they might decide, as they did with Ireland, that they need to cut their positions. That can trigger difficult negotiations at very difficult times for the country concerned. Maybe there should be more transparency and stability in this crucial area of policy.