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Isabel Rodríguez Tejedo, School of Economics and Business Administration, University of Navarra, Spain

Down with the barriers of fear... and then what?

Sat, 17 Apr 2010 09:50:43 +0000 Published in Expansion (Madrid)

Although there is a lack of serious comparisons, with data and robust analysis, the stories with a Greek tragedy flavor are repeated. Even the sharks that had been circling the Greek debt were beginning to doubt that the prey had much blood left in it. April and May are shaping up to be difficult months for meeting debt payments, and just a few days ago there were those who thought that if Greece dared to put more bonds on the market, there would be no takers.

The options do not favor optimism. Throw Greece overboard and have it jump ship from the single currency? Just remember that there are no formal procedures for leaving the Euro, so for the Hellenic country that would probably mean leaving the EU. The consequences for the Greeks would be very long to explain, suffice it to simply say that "it's cold out there." And I leave to individual reflection what Greece's expulsion or exit would mean for the rest of the European system. Or we could let them sort out their own problems, if we think they can cope on their own, but that doesn't seem likely.

In the end, the Eurogroup opts for the financial aid. 30 billion euros, financed mainly by Germany and France, which is the concretization of that vague "to do whatever is necessary to maintain financial stability in the Euro zone". Although there is no confirmation that Greece will make immediate use of the financial aid, it is to be expected that they will do so sooner rather than later.

The plan has finally been presented despite very strong resistance. Although the costs of letting Greece default are clear, the civil service examination bail out is easy to understand. The Lisbon Treaty (article 125, for those who love details) explicitly forbids it. We can argue about the details, but the letter of the text is quite clear. Just as clear was the German Constitutional Court's ruling last year on the Maastricht Treaty, which emphasized the role core topic of stability for the German presence in the monetary union.

The Stability Pact was, from its inception, not very credible and has result (no surprises here) been ineffective. And although even the Germans have benefited from this ineffectiveness, the "no bailout" clause is for many observers the last defense for the credibility of the system.

The official German reluctance, which is accompanied by growing discontent among the German population, is hardly surprising. There is a widespread feeling that the problem is that Greece's current status is not the reason for the mess. The problem is that Greece is Greece, just as Spain, Italy and other companies are as they have always been: fiscally irresponsible states, where a markedly short-sighted policy deadline necessarily condemns them to disaster.

Faced with a problem that they perceive as structural, an emergency solution such as this seems to them to be a poorly placed patch. And the bailout plan, "throwing good money where bad money goes". The Greek austerity plan, the complaints about the harshness of the adjustment and the repetition of the slogan that we are talking about loans and not gifts do not manage to obscure the fact that the EU countries are going to lend money in the midst of the economic crisis to finance the excesses of others.

Among bad solutions, it is probably the least bad, if we can make the bailout work (Soros, who spoke of a "death spiral" this week, is not alone in not having it all his own way). But we also need to convince the markets, and the countries potentially waiting in the bailout queue, that this is not the way things are going to be in the future.

The "no bailout" was a way to create fear among the fractious and to avoid problems that the Stability Pact was not sufficiently solvent to prevent. Now that both have been thrown out, another formula will have to be found. If possible, one that works.