The EU and Greece: a little bit of carrot and a lot of stick

The EU and Greece: a little bit
of carrot and a lot of stick
• EU keeps the pressure on Greece: this week brings not only more stick, but also more clarity on the stick
• No further details provided on the carrot
• March 16 key date for Greece to deliver

Over the past week, EU leaders have made their views on the Greek situation fairly clear. On the one hand, the rest of the region requires Greece to make an appropriate fiscal adjustment, which will be measured by the achievement of a fiscal deficit of 8.7% of GDP this year and a fiscal deficit of below 3% of GDP by 2012. On the other hand, the fiscal capacity of the region as a whole will be used, if needed, to safeguard financial stability in the Euro area. EU leaders
clearly feel that the monetary union is under some kind of attack, and they will act accordingly to protect it. However, what does this expression of support mean for Greece itself? One way to think about this is to consider what the road map ahead might look like.

By March 16, Greece needs to present a report explaining how the budgetary measures for 2010 are being implemented. This report has to explain what additional measures will be taken in the event that the fiscal adjustment is not tracking the target, either due to slow implementation,
weaker-than-expected growth, or higher-than-expected borrowing costs.

If Greece complies with all of the demands from the rest of the EU by implementing the fiscal measures that the rest of the region wants, and then experiences a genuine liquidity crisis in
April and May, as it seeks to continue to finance its deficit and roll over the debt that is maturing, then the rest of the EU will provide financial support. The precise mechanism has not been laid out; it could be either areawide loans, credit lines, and guarantees, or bilateral loans, credit lines, and guarantees. We do not envisage any legal or logistical problems with the rest of the region providing ad hoc support.

If Greece fails to comply with all of the demands from the rest of the EU, and then experiences a genuine liquidity crisis in April and May, the most obvious next step for the region is to push Greece into the arms of the IMF. The IMF would then provide a program of financial support, with appropriate amounts of conditionality, to give Greece a couple of years to implement the appropriate fiscal adjust-

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