EU Economy
Euro is a marriage with no divorce option
By Michael Hennigan, Finfacts founder and editor
Feb 11, 2015 - 7:17 AM

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We have in the past compared the euro to "Hotel California," the 1970s song by the Eagles rock group, which has the lyrics "You can checkout any time you like/ But you can never leave!" This month Jean-Pierre Roth, former head of the Swiss National Bank, Switzerland's central bank, said that there is no way out of the euro. “The chaos would be overwhelming.”

Roth said in an interview that the term "euro crisis" is a misnomer.

"The finance ministers came up with this term to divert attention away from them. In truth, this is a public finance crisis. National debts in Europe are high, and the outlook is grim. The population is ageing; the ratio of the working population to those who have retired will continue to worsen, health care costs are rising. In addition, the economy is growing slowly, but the European countries' social models are based on annual growth of four to five percent. This can't work."

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On the Greek crisis, Deutsche Bank economists said in a note [pdf] last week: "While a prolonged standoff between Greece and the euro area should be expected, we still consider a balanced agreement as the most likely outcome in the end. The risk of political accidents in the course of negotiations cannot be excluded, though."

Speaking in parliament in Athens ahead of a confidence vote which the governing coalition won, Alexis Tsipras, Greek prime minister, said that his government would not request an extension to its existing "bailout" agreement with the EU, despite pressure from Wolfgang Schäuble, German finance minister.

"I want to repeat today, no matter how much Schäuble asks it, we are not going to ask to extend the bailout," Tsipras said, saying that Greece "cannot return to an age of bailouts and suppression."

A special meeting Wednesday of the Eurogroup of Euro Area finance ministers will discuss the Greek crisis and a summit of  EU leaders will take place on Thursday and Friday.

Alexis Tsipras is due to meet Angela Merkel, German chancellor, and early next week the regular monthly meetings of the Eurogroup and Ecofin, the council of the EU28 finance ministers, will also discuss Greek demands.

“I don’t think that there should be casual talk about the kind of resolution that would end up leaving Greece in a place that is unstable or the EU in a place that is unstable,” said Jack Lew, US Treasury secretary, speaking to reporters on the margins of the Group of 20 finance ministers meeting in Istanbul.

Yanis Varoufakis, Greek finance minister, briefed Greek media on Monday, on a plan to use debt swaps to reduce Greece’s debt burden and raise €5bn-€8bn by issuing treasury bills to maintain government funding while a new deal with Europe is worked out. Greece also proposes dropping about a third of proposed troika structural reforms and these would be replaced by 10 unspecified new measures prepared with assistance from the Paris-based Organisation for Economic Cooperation and Development. Greece is also seeking to reduce this year’s primary budget surplus target from 3% to 1.49% of national output to release funds for increased welfare spending.

Wolfgang Schäuble who met Varoufakis last Thursday in Berlin was not impressed by the new Greek plan saying he expected Athens to live up to the terms of its existing €172bn bailout before he would consider new proposals.

“We are not negotiating a new programme,” Schäuble, who was also in Istanbul, said. “We already have a programme.” Schäuble added that if Greece did not want a new rescue programme “then that’s it.”

Pierre Moscovici, EU economic affairs commissioner, said a deal to extend the bailout would have to be reached by next Monday if talks were to continue.

While Greece does not want to ask for an extension of the bailout which expires on February 28, Moscovici said it was necessary to have enough time for parliaments in some Eurozone countries to approve the extension.

The Financial Times reports that Athens signalled it was ready to end a two-week stand-off over its demand to end the current bailout before embarking on a new programme. A senior finance ministry official said a “bridge agreement” could be described by its partners as “a technical extension” of the existing arrangement, "a move that would be a significant reversal of Mr Tsipras’ stand."

Greek PM Alexis Tsipras says he won't seek an extension of the bailout plan when it expires at the end of February – putting Athens on a collision course with creditors. FT capital markets editor Ralph Atkins explains Greece's crisis in five charts.


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