Open Europe press release: Bailing out Greece will send the eurozone and the EU down the wrong path

A Greek bailout: is it legally possible and what will it cost to EU taxpayers?

10 Feb 2010

 

English version

French version

 

As EU leaders gather in Brussels to discuss the crisis facing the eurozone, Open Europe has published an overview of the ways in which Greece could be bailed out by the EU and what these solutions could cost European taxpayers. A bailout now looks more likely, as markets continue to react to reports that EU leaders have in principle agreed to extend aid to Greece. 

However, Open Europe argues that an EU-led bailout will come with huge economic and political risks, and will for the first time make Europe’s taxpayers fully liable for an individual country’s debts, while centralising new economic powers at the EU-level. 

Open Europe’s Pieter Cleppe said:
 
“Bailing out Greece will send the eurozone and the EU down the wrong path. It will send the signal that mismanaging a country’s economy is no big deal, which in turn would undercut Europe’s budget discipline at a time when we need restraint more than ever.” 

“A large scale bailout would make taxpayers across Europe liable, either directly or indirectly, for the mistakes of a government over which they have no democratic control. Such a policy simply isn’t reasonable and lacks public support.” 

“This crisis has revealed the inherent frailties of the euro. The public has never been asked, and is understandably reluctant, to give a mandate for a formal mechanism of fiscal transfers from the richer to the poorer members of the eurozone. Without such a mechanism, a one-off bailout will only see the euro project through to the next crisis and leave its long term problems unsolved.” 

To read Open Europe’s briefing click here: http://archive.openeurope.org.uk/Content/Documents/PDFs/greecebailout.pdf 
 
Key findings:
 
· All of the options on offer carry significant costs for the eurozone and, in some cases, for the other non-eurozone members of the EU, such as the UK.
· The legality of a bailout under the EU Treaties is doubtful – of the ten options for a bailout which Open Europe looked at, only one is unambiguously legal under the Treaties, meaning that EU leaders are set to bend EU law if going ahead with a rescue package. This sets a worrying precedent.
· Open Europe also finds that a bailout of Greece could cost EU taxpayers up to €30 billion in a first instalment. Meanwhile, British taxpayers could be affected in six out of the ten alternatives currently being considered for a possible bailout of Greece.
· However, a one-off bailout would not address the enormous discrepancies in competiveness and productivity between different eurozone members, which continue to put the eurozone under strain.
· If these structural differences are to be overcome and the eurozone is to survive for the long term, ongoing fiscal transfers from the rich German-led bloc to the poorer bloc, consisting of countries such as Greece and Spain, might be the only feasible option. Calculations by Banque AIG in 2008 suggested that such annual transfers could be of the order of seven percent of German GDP – which dwarfs the amounts involved in a one-off rescue operation.
· There is very little popular support for a one-off bailout, much less for ongoing transfers. An Open Europe poll of German voters in 2009 found that 70% were opposed to using taxpayer funds to bail-out countries in financial difficulties such as Ireland or Greece[1].
· Open Europe concludes that, taking all short term alternatives into account, EU leaders should either let Greece default, in order to avoid a massive moral hazard scenario which could impose even higher costs down the road, while also avoiding policies for which there is no popular support; or go to the IMF, which has the necessary experience in coming to the rescue of individual countries. This would also avoid the huge complications involved in cross-border transfers of money and establishing central EU economic governance.
· However, these short term measures will not address the structural lack of competitiveness that affects not only Greece, but also countries such as Spain and Portugal. The lack of a public mandate or support for establishing a formal system of fiscal transfer from poorer to richer eurozone countries will leave EMU with long term frailties that will be exposed again in future economic crises. 

OPTIONS FOR AN EU BAILOUT OF GREECE
1. Direct bailout
Costs: Unclear, but possibly up to €30bn in first instalment/moral hazard.
UK taxpayers affected? Yes
Is it legal? Probably not
2. Early payment of cohesion funds
Costs: €18.1 bn
UK taxpayers affected? Yes
Is it legal? Yes
3. Extending balance of payments facility
Costs: EU taxpayers liable/moral hazard
UK taxpayers affected? Yes
Is it legal? No
4. Common eurozone bonds
Costs: Punishing fiscally sound countries/moral hazard
UK taxpayers affected? No
Is it legal? Probably not
5. Setting up a European Monetary Fund
Costs: EU taxpayers liable
UK taxpayers affected? Yes
Is it legal? Probably not
6. Bilateral or multilateral loans
Costs: Place burden on a few member states/moral hazard
UK taxpayers affected? No
Is it legal? Probably not
7. Loans or investments by EIB
Costs: Risks transferred to EU taxpayers
UK taxpayers affected? Yes
Is it legal? Unclear
8. EU governments or EIB buy Greek bonds
Costs: Risks transferred to EU taxpayers
UK taxpayers affected? Yes
Is it legal? Unclear
9. ‘Interest rate bailout’ by ECB
Costs: Unsuitable interest rates for the ‘German bloc’ of eurozone countries that could cause inflation
UK taxpayers affected? No
Is it legal? No
10. Indirect bailout by ECB
Costs: Transfers costs of Greek borrowing to rest of eurozone and could cause inflation in the longer term
UK taxpayers affected? No
Is it legal? No