The latest move in the “so what are we gonna do about Greece?” EU vs. Greece drama was that Greece was playing non-negotiable, saying it had agreed to reduce its fiscal deficit by 4% of GDP (from over 12.7% to 8.7%) and it was premature to talk about doing more at this juncture.
That posture is not going over well in Brussels. This is the key section of a recap from Bloomberg:
The ministers from the 16 nations that use the euro told Greek authorities to ready more deficit measures by March 16, in case the government fails to show sufficient progress on its budget goals in a report to the European Commission…. “We’re waiting for Greece to prove that it’s taking very seriously the commitments it has made,” Luxembourg’s Jean- Claude Juncker said late yesterday after leading a meeting of euro-area finance ministers in Brussels. Should the government’s efforts not satisfy the commission, the EU “will impose on Greece the acceptance of additional measures,” he said….
The ministers signaled that Papandreou’s plan may not be enough and told the government to prepare more measures by mid- March, including higher value-added taxes, a new levy on luxury goods, increased taxes on energy products and cuts in capital spending. It’s up to Greece to decide on the specific actions.
Yves here. One thing that strikes me as odd is various remarks from EU officials that come close to saying that Greece needs to be punished. Huh? This may simply be playing to audiences back at home, but even the deemed-to-be-inadequate 4% budget cut is going to be exceedingly painful. Deflationary debt unwinds are ugly affairs and no country that has been through one is keen to go repeat the experience. Just consult the record of Thailand and Indonesia post the Asian crisis.
Despite the current apparent loggerheads, most observers seem confident that Greece will knuckle under because it has to. Not only does Greece face the pressure of maturing debt starting in April, but the EU can also impose very hefty fines for Greece’s violation of Maastricht rules. But even though the markets seem more upbeat about the euro this morning, any resolution is likely to be a hard-fought process.