Following misguided neoliberal market fundamentalist advice, Greece abandoned
its national currency, the drachma, in favor of the euro in 2002. This
critically consequential move enabled the Greek government to benefit from the
strength of the euro, albeit not derived exclusively from the strength of the
Greek economy, but from the strength of the economies of the stronger eurozone
member states, and to borrow at lower interest rates collateralized by Greek
assets denominated in euros.
With newly available credit, Greece then went on a debt-funded spending spree,
including high-profile projects such as the 2004 Athens Olympics that left the
Greek nation with high sovereign debt not denominated in its national currency.
Further, this borrowing by government in boom times amounted to a brazen
distortion of Keynesian economics of deficit financing to deal with cyclical
recessions backed by surpluses accumulated in boom cycles. Instead, Greece
accumulated massive debt during its debt-driven economic bubble.
By adopting the euro, a currency managed by the monetary policy of the
supra-national European Central Bank (ECB), Greece voluntarily surrendered its
sovereign powers over national monetary policy, and rested in the false comfort
that a supra-national monetary policy designed for the stronger economies of
the eurozone would also work for a debt-infested Greece.
As a eurozone member state, Greece can earn and borrow euros without
exchange-rate implications, but it cannot print euros even at the risk of
inflation. The inability to print euros exposes Greece to the risk of sovereign
debt default in the event of a protracted fiscal deficit and leaves Greece
without the option of an independent national monetary solution, such as
devaluation of its national currency.
Notwithstanding a lot of expansive talk of the euro emerging as an alternative
reserve currency to the US dollar, the euro is in reality just another
derivative currency of the dollar. Despite the larger gross domestic product
(GDP) of European Union as compared with that of the US, the dollar continues
to dominate financial markets around the world as a benchmark currency due to
dollar hegemony, which requires all basic commodities to be denominated in
dollars. Oil can be bought by paying euros, but at prices subject to the
exchange value of the euro to the dollar. The EU simply does not command the
global geopolitical power that the US has possessed since the end of World War
II.
The EMU vision
In 1998, EU member states that met the convergence criteria of the Economic and
Monetary Union (EMU) formed a eurozone of 11 member states, with the official
launch of a common currency known as the euro on January 1, 1999. Greece
qualified in 2000 and was admitted on January 1, 2001.
The eurozone is an Economic and Monetary Union (EMU) of 16 member states, out
of the 27-member European Union, that have adopted the euro as their sole
common legal tender. The eurozone currently consists of Austria, Belgium,
Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta,
the Netherlands, Portugal, Slovakia, Slovenia and Spain. Eight (not including
Sweden, which has a de facto opt out by domestic popular vote) other states are
obliged to join the zone once they fulfill the strict entry criteria.
The euro convergence criteria as spelled out in the Stability and Growth Pact
(SGP) are: 1. Inflation rates: No more than 1.5 percentage points
higher than the average of the three best performing (lowest inflation) member
states of the EU. 2. Government finance:
Annual government fiscal deficit: The ratio of the annual government fiscal
deficit to GDP must not exceed 3% at the end of the preceding fiscal year. If
not, it is at least required to reach a level close to 3%. Only exceptional and
temporary excesses would be granted for exceptional cases.
Government debt: The ratio of gross government debt to GDP must not
exceed 60% at the end of the preceding fiscal year. Even if the target cannot
be achieved due to the specific conditions, the ratio must have sufficiently
diminished and must be approaching the reference value at a satisfactory pace. 3. Exchange rate: Applicant countries should have joined the
exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for
two consecutive years and should not have devaluated its currency during the
period. 4. Long-term interest rates: The nominal long-term interest rate
must not be more than 2 percentage points higher than in the three lowest
inflation member states.
The euro convergence criteria of the EMU aim to "maintain price stability"
within the eurozone as new member states are admitted. In economics,
"maintaining price stability" is essentially a euphemism for maintaining
structural unemployment, which is generally accepted as 6%. Such numerical
criteria have been criticized by Keynesian economists as being insufficiently
flexible to meet fluctuations in business cycles. Further, criteria need to be
applied over the length of the entire economic cycle rather than in any one
year. These institutionalist critics fear that by limiting governments'
abilities to employ Keynesian measures of government deficit spending during
economic slumps, long-term growth will be stalled by unnecessary recessions.
From the opposite side, monetarists criticized these numerical criteria as
being too flexible as to become ineffective because "creative accounting"
gimmickry can be used and have been used by many member states to meet the
required deficit to GDP ratio of 3%, and by the immediate abandonment of fiscal
prudence by some member states as soon as they are admitted to the euro club.
As it happened, "creative accounting" through the use of collateralized debt
obligations (CDOs) via special purpose vehicles (SPV) rendered Stability and
Growth Pact (SGP) criteria meaningless and ineffective in preventing financial
crises all over the world.
German and French efforts to water down SGP Ironically, the watering down of the Stability and Growth Pact had been at
the request of Germany and France, two of the strongest of the 16 member states
which had been imitating the rush to phantom wealth creation through synthetic
structured finance and debt securitization invented by fearless young traders
in New York and London working with money provided by central banks led the
Federal Reserve. In March 2005, the EU’s Economic and Financial Affairs Council
(ECOFIN), under the pressure of France and Germany, relaxed the rules to
respond to criticisms of insufficient flexibility and to make the pact more
enforceable. Permissiveness infested the theoretical regulatory framework.
ECOFIN is one of the oldest configurations of the Council of the European Union
and is composed of the economics and finance ministers of the 27 European Union
member states, as well as budget ministers when budgetary issues are discussed.
The EU Council covers a number of EU policy areas, such as economic policy
coordination, economic surveillance, monitoring of member state budgetary
policies and public finances, the shape of the euro (legal, practical and
international aspects), financial markets and capital movements and economic
relations with third countries. It also prepares and adopts every year,
together with the European Parliament, the budget of the European Union, which
is about 100 billion euros (US$124 billion).
The council meets once a month and makes decisions mainly by qualified
majority, in consultation or co-decision with the European Parliament, with the
exception of fiscal matters, which are decided by unanimity. When the ECOFIN
examines dossiers related to the euro and EMU, the representatives of the
member states whose currency is not the euro do not take part in the vote of
the council.
At the urging of Germany and France, the ECOFIN agreed on a reform of the SGP.
The ceilings of 3% for budget deficit and 60% for public debt were maintained,
but the decision to declare a country in excessive deficit can now rely on
certain parameters: the behavior of the cyclically adjusted budget, the level
of debt, the duration of the slow growth period and the possibility that the
deficit is related to productivity-enhancing procedures. The pact is part of a
set of Council Regulations, decided upon at the European Council Summit 22-23
March 2005.
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