Thursday, 17 May 2012

The EU must prepare for the unavoidable

The mixed signals coming from Europe are not doing Greece any good.  On the contrary they are adding to the false credibility of the new poltical forces in Greece who have built their policy on the illusion that they can have the cake and they can eat it too.

Alexis Tsipras Komotini cropped.jpg
Tspras - playing
poker Greece future
The only signal that the EU should send to Greece is that whether they stay or leave the Euro is a decision that only Greeks can take, but that staying in the Euro would mean respecting and honouring all agreements signed with the Troika, irrespective of other new inititaives on growth pacts that may agreed by the EU to run in parallel to the fiscal pact or as an enhancement thereto.

Repeating and stressing that the EU will do its utmost to keep Greece within the Euro gives the impression that EU is terrified by the nuclear fallout of any member leaving the Euro.   It strenghtens the hand of Alexis Tsipras of SYRIZA in claiming that the EU can be bullied to backtrack on its austerity demands and that it can be forced let Greece in the Euro.  This is just as well as saying that the EU would agree to continue subsidizing indefintely Greeks living beyond their means without the need for structural adjustments.

It would be much fairer and equitable if the language of EU leaders becomes consistent,  clear and unambiguous.   Much better for the EU to tell Greeks that the next elections are more like a referendum on whether they want to stay in or leave the Euro and any democratic mandate to any party to renegotiate the austerity package would be taken as a decision to leave the Euro.

In the meantime the EU must be seen to be making clear and credible preparations to build a firewall around Greece to contain the damage from their Euro exit.  This must at least contain:

  1. Huge, may be unlimited, ECB liquidity injection initiatives to ensure that Banks in all EU countries other than Greece have all the necessary liquidity to meet and nip in the bud any loss of confidence by depositors in EU countries outside Greece.
  2. Display of readiness by the ECB to intervene directly in the bond markets to keep within serviceable limits yields on bonds of countries undergoing and adhereing to austerity programmes.
  3. Launch of a huge fund whereby the EIB will supply fresh capital to EU banks that are judged insolvent not merely illiquid.  This especially applies to Cyprus given their exposure to Greece, and to Spain given the bad assets still lying on their banks books.
Time is running out.  I am not sure if we have the luxury to wait till after the June 17th elections in Greece, as if the flow of withdrawal of Euro deposits from Greek banks swells to unsustianable limits,  the Greek plane flying with no engines will crash before the 17th June.   The EU has a duty to ensure that it crashes in an open field not in a city centre.

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