As Greece Prime Minister George Papandreou desperately seeks to restore the European Union’s confidence in the country’s proposed austerity measures, market watches continue to bear witness to the fractioning Union.
The success of Greece's imminent €3-5 billion bond issue is intrinsically linked to global market confidence in the EU, with the debt-issue ramifications extending beyond purely economic means, as belief in the continuity and cohesion of the EU are the cornerstones of the successful marketing to the appetite of global investors.
Already we have seen equity and foreign exchange markets jitter as the political rhetoric streams from European leaders regarding the possibility of an EU bail-out, which would have the disastrous consequence of setting a precedent to other financially distressed governments within the Union (read: Spain, Italy, Portugal).
However the social animosity between member nations, none more so than exemplified in the German and Greek media exchanges seen last week, is the key underlying threat to EU stability.
So how did these nations find themselves in such vulnerable circumstances?
The current debt-situation in Europe is the product of excessive Keynesian policies pursued during the boom-years of 2003-2007, in which previous governments borrowed excessively on cheap credit to fund public spending.
Although other nations such as Spain, Italy and Portugal find themselves in similar debt-ridden situations, none face as significant risk as Greece due to the massive debt accumulation of €300 billion (112.6% of GDP), of which €20 billion is needed to cover maturing debt in April and May of this year.
Greece’s commitment to reduce its budget deficit by 400 basis points to 8.7% with severe austerity measures, cutting both fiscal expenditure and increasing public and private taxation, is an attempt to restore the government’s budget deficit to EU sanctioned levels. It has been commended by partner EU members.
However, Greek workers from the public sector continue to rally against the imposed measures. Media reports suggest some 16% of the public sector workforce have gone on strike.
The success of Greece's imminent €3-5 billion bond issue is intrinsically linked to global market confidence in the EU, with the debt-issue ramifications extending beyond purely economic means, as belief in the continuity and cohesion of the EU are the cornerstones of the successful marketing to the appetite of global investors.
Already we have seen equity and foreign exchange markets jitter as the political rhetoric streams from European leaders regarding the possibility of an EU bail-out, which would have the disastrous consequence of setting a precedent to other financially distressed governments within the Union (read: Spain, Italy, Portugal).
However the social animosity between member nations, none more so than exemplified in the German and Greek media exchanges seen last week, is the key underlying threat to EU stability.
So how did these nations find themselves in such vulnerable circumstances?
The current debt-situation in Europe is the product of excessive Keynesian policies pursued during the boom-years of 2003-2007, in which previous governments borrowed excessively on cheap credit to fund public spending.
Although other nations such as Spain, Italy and Portugal find themselves in similar debt-ridden situations, none face as significant risk as Greece due to the massive debt accumulation of €300 billion (112.6% of GDP), of which €20 billion is needed to cover maturing debt in April and May of this year.
Greece’s commitment to reduce its budget deficit by 400 basis points to 8.7% with severe austerity measures, cutting both fiscal expenditure and increasing public and private taxation, is an attempt to restore the government’s budget deficit to EU sanctioned levels. It has been commended by partner EU members.
However, Greek workers from the public sector continue to rally against the imposed measures. Media reports suggest some 16% of the public sector workforce have gone on strike.
Greek Police clash with protesters in AthensSource: The Guardian, 24th February 2010
This dichotomy between home and neighbour nations responsibility within the EU is a structural problem in the EU framework, which attempts to emulate a state-system by combining vastly different cultures and beliefs under a European umbrella.
This is seen through the self-interested groups which make the union, who ostensibly don’t want to lose the benefits or positions they currently enjoy. This patriotic theme holds greater for a country, then a union. In a laymen terms – a German citizen is firstly German, and secondarily an EU member.
This inherent nationalism within the EU member nations strengthens when faced with uncertainty. Like oil to fire, countries continue to point-fingers and reignite historic animosity when politically and socially unpopular decisions are to be made.
Germany, encompassing ~28% of the weight of the EU (determined on population and GDP metrics), holds the largest exposure to any EU actions (or in-action), and as expected, has been involved in the most public communication with Greece.
As reported by the Daily Mail (27th Feb, K. West), last week saw the patriotic feud between Germany and Greece spill into new depths. As Merkel and Papandreou promote constructive talks between the nations, public media continue to stir the nationalistic principles through conspicuous defamation of national symbolism.
The Media continues to stir nationalism Source: Daily Mail and Trust, 27th February 2010
Focus, Germany’s third largest weekly magazine by distribution, ran the cover last week of the Venus de Milo, an emblem of Greek history and culture, displaying a provocative hand motion with the subtitle accusing Greece of falsifying its economic position to gain acceptance to the EU.
Although previously confirmed by the Greek government, it remains one of the legacy issues of a previous parliament, a common scapegoat used by many of the distress EU nations who place the blame of the current situation on previous government’s financial unconstrained spending.
In an indirect response, Greek daily Eleftheros Typos ran a subsequent depiction of the monument of Victoria presenting a swastika. These actions follow recent turmoil from the Greek public following accusations that the German nation had not fully compensated Greece for the actions of the Nazi regime.
German compensation has been stipulated at 115 million Deutsche marks since 1960, with further payments for forced laborers of the Nazi regime. Furthermore, German participation in EU Aid, to countries such as Greece, has totaled around 33 billion Deutsche marks. So although rhetoric of Nazi actions are ideal to further fuel the nationalistic war between any nation, it is far from the truth.
The benefit of these actions by the media is only found in entrenching the nationalism that has limited the success of the EU. These social viewpoints are strongly to the contrary to some political viewpoints, such as Angela Merkel, who continues to acknowledge the role of other EU nations in solving Greece’s debt problems together.
Although reassuring, the EU has only committed to political support as of yet, however a possible announcement looms into the financial actions the broader EU will take. The key problem is the Greek debt situation is not an isolated event.
Monetarily-tied countries are able to pursue diverse economic policies, which although unnoticed in economic prosperity as the Union grew to 27 members and a US$15.2 trillion GDP in 2008, the union has dire consequences as countries are bound to the weakest member in times like these. Likewise the huge differences in economic competitiveness between countries such as Greece and Portugal to France and Germany will continue to diminish the credibility of the Euro currency.
Several nations may be likely to seek an EU intervention if their economic situation deteriorates further – thus a financial bail-out by wealthy member nations may encourage other distressed governments to seek financial aid (Spain currently has a budget deficit of 11.4% of 2009 GDP). Accordingly, EU partners fear market volatility caused by Greece will spread to other countries and that the integrity of the euro will diminish.
Whichever outcome the EU takes with Greece, either through a bail-out, bond issue or ostracising distressed nations from the Union, market speculators are already taking positions to benefit from the imminent volatility expected in the Euro.
As reported by the Daily Mail, active and experienced market participants have placed their bets for the success of the bond issue (at an viable interest rate) all on red, not only from Greece’s deteriorating credit situation, but on the structural problems that will continue to hinder economic prosperity in the EU.
Overcoming the inherent structural-flaws in clash of nationalism and responsibility of financial liabilities within the union, are the firsts step in ensuring EU succession beyond the short-term turmoil.
Focus, Germany’s third largest weekly magazine by distribution, ran the cover last week of the Venus de Milo, an emblem of Greek history and culture, displaying a provocative hand motion with the subtitle accusing Greece of falsifying its economic position to gain acceptance to the EU.
Although previously confirmed by the Greek government, it remains one of the legacy issues of a previous parliament, a common scapegoat used by many of the distress EU nations who place the blame of the current situation on previous government’s financial unconstrained spending.
In an indirect response, Greek daily Eleftheros Typos ran a subsequent depiction of the monument of Victoria presenting a swastika. These actions follow recent turmoil from the Greek public following accusations that the German nation had not fully compensated Greece for the actions of the Nazi regime.
German compensation has been stipulated at 115 million Deutsche marks since 1960, with further payments for forced laborers of the Nazi regime. Furthermore, German participation in EU Aid, to countries such as Greece, has totaled around 33 billion Deutsche marks. So although rhetoric of Nazi actions are ideal to further fuel the nationalistic war between any nation, it is far from the truth.
The benefit of these actions by the media is only found in entrenching the nationalism that has limited the success of the EU. These social viewpoints are strongly to the contrary to some political viewpoints, such as Angela Merkel, who continues to acknowledge the role of other EU nations in solving Greece’s debt problems together.
Although reassuring, the EU has only committed to political support as of yet, however a possible announcement looms into the financial actions the broader EU will take. The key problem is the Greek debt situation is not an isolated event.
Monetarily-tied countries are able to pursue diverse economic policies, which although unnoticed in economic prosperity as the Union grew to 27 members and a US$15.2 trillion GDP in 2008, the union has dire consequences as countries are bound to the weakest member in times like these. Likewise the huge differences in economic competitiveness between countries such as Greece and Portugal to France and Germany will continue to diminish the credibility of the Euro currency.
Several nations may be likely to seek an EU intervention if their economic situation deteriorates further – thus a financial bail-out by wealthy member nations may encourage other distressed governments to seek financial aid (Spain currently has a budget deficit of 11.4% of 2009 GDP). Accordingly, EU partners fear market volatility caused by Greece will spread to other countries and that the integrity of the euro will diminish.
Whichever outcome the EU takes with Greece, either through a bail-out, bond issue or ostracising distressed nations from the Union, market speculators are already taking positions to benefit from the imminent volatility expected in the Euro.
As reported by the Daily Mail, active and experienced market participants have placed their bets for the success of the bond issue (at an viable interest rate) all on red, not only from Greece’s deteriorating credit situation, but on the structural problems that will continue to hinder economic prosperity in the EU.
Overcoming the inherent structural-flaws in clash of nationalism and responsibility of financial liabilities within the union, are the firsts step in ensuring EU succession beyond the short-term turmoil.
Sources:
- Iceland should stand up to shameful bullying
By John Kay, FT 23rd February - Man who broke the Bank of England at centre of hedge funds plot to cash in on fall of the euro
By Karl West, Mail Online 27th February - Scenarios - Greece keeps Markets guessing
By Alex Chambers, Reuters 26th February - Greece Debt sees one big day fall
By Dimitris Kontogiannis, 25th February
Really great analysis, layout and opinion!
ReplyDeleteGood discussion of the news issue; good use of images and well presented in class. Your introduction could have been more engaging in line with the beginning of your presentation to really draw in the reader. As a blog author you want others to read your blog outside this class - so it's always entertaining to flirt with controversy. Well done. 6.5/10
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