Finance ministers from the euro zone’s four biggest countries held a secretive meeting in Luxembourg on Friday night (6 May) to discuss Greece’s debt woes, amid speculation that Athens was threatening to leave the common currency.
Jean-Claude Juncker, chairman of the Eurogroup, said after the meeting there was consensus that Greece needed a new plan to pay back its crippling debt.
“We think that Greece does need a further adjustment programme,” Juncker said after talks with the finance ministers of Greece and the zone’s biggest economies: Germany, France, Italy and Spain.
“This has to be discussed in detail and will be taken up at the next Eurogroup meeting on 16 May,” Juncker said, referring to a conference of finance ministers of all 17 eurozone states.
Ministers from the euro zone’s biggest economies met in Luxembourg to discuss Greece’s debt crisis on Friday but Athens and senior EU officials denied a report by Germany’s Spiegel Online that the Greek government had raised the prospect of leaving the 17-member euro zone.
“These scenarios are borderline criminal,” Papandreou told a conference on the Ionian island of Meganisi. “No such scenario has been discussed even in our unofficial contacts [...] I call upon everyone in Greece and abroad, and especially in the EU, to leave Greece alone to do its job in peace.”
The Luxembourg talks were also attended by European Central Bank President Jean-Claude Trichet and Olli Rehn, the European commissioner for economic and monetary affairs.
Revised Greek plan
Publicly, officials in Athens and around Europe continue to insist that restructuring the Greek government bonds held by private investors is not on the cards. But privately, officials increasingly concede that some form of restructuring – perhaps an extension of maturities on the bonds – may be inevitable.
A revised Greek plan could include pushing further into the future the targets for Greece to cut its budget deficit, easing the terms of its emergency loans, and giving it additional money, EU official sources and analysts say.
Greek Finance Minister George Papaconstantinou, who attended the Luxembourg talks, said Greece remained committed to repairing its finances and returning to economic growth.
“Markets continue to have doubts and we have scheduled our next steps for 2012,” Papaconstantinou told reporters on Saturday when asked about what was discussed at the meeting.
“We [Greece] will either go out to markets or use the recent decision by the EU Council that allows the European fund (EFSF) to buy Greek bonds. That was what the discussion was about.”
Any restructuring of Greek bonds would fuel speculation about similar action for Ireland and Portugal. The Irish Mail on Sunday reported, quoting an unnamed senior minister in Dublin, that Ireland’s government expected the country’s debt would be restructured within the next three years.
Euro exit ‘stupid’: Juncker
Jean-Claude Juncker, who called the late Friday meeting, said there was a broad discussion of Greece and other international economic issues but said the idea of exiting the euro was stupid.
“We have not been discussing the exit of Greece from the euro area. This is a stupid idea. It is in no way – it is an avenue we would never take,” he told reporters after the meeting.
“We don’t want to have the euro area exploding without reason. We were excluding the restructuring option, which is discussed heavily in certain quarters of the financial markets,” he added.
Costs and benefits of leaving the euro
The costs to a country of leaving the euro zone would be so high that many analysts think the bloc will do everything in its power to prevent an exit, even if that requires the richest members to keep bailing out weak states.
Greece would have to hive off its bank deposits from the rest of the eurozone banking system as it introduced a new currency, risking a run on its banks and huge disruption for its companies.
“To me the euro zone is a one-way street,” said Gilles Moec, senior European economist at Deutsche Bank. “A breakup would have catastrophic consequences for the country that left. It would precipitate a run on the banks. I can’t see how you do it in an orderly way.”
But others believe leaving the euro would free Athens of many economic policy constraints as it battles through recession.
By reintroducing the drachma, the argument goes, Greece could sharply devalue its currency against the euro and keep official interest rates ultra-low, regain competitiveness, and tackle its debt problem without the political and social upheaval associated with years of austerity-fuelled recession.
“I’m not suggesting that these stories are right,” said Jonathan Loynes, chief European economist at Capital Economics. “But we have said that we think it’s quite likely that there will be some change to the membership of the euro area over the next four to five years and that one possible form will be the exit of a small economy like Greece.”
“I don’t think the idea is implausible at all.”
But US economist Barry Eichengreen, who authored a 2007 paper arguing that the single currency could not be undone, reaffirmed that belief last year as the Greek crisis deepened.
“Adopting the euro is effectively irreversible,” he wrote in an article on the economics website Vox.
“Leaving would require lengthy preparations, which, given the anticipated devaluation, would trigger the mother of all financial crises,” said Eichengreen, a professor at the University of California, Berkeley.
Moreover, there is no legal procedure for leaving the euro zone and some economists argue that treaty changes would have to take place before an exit could happen.
“You would have to make it legal in order to leave,” said Moec of Deutsche Bank. “You would probably have years of litigation on all the debt held outside the country.”
Trade flows would probably be severely disrupted. Business costs would become unpredictable, inhibiting investment. Labour unrest and social strife would likely result as citizens faced mass unemployment, inflation and brutal public spending cuts.
That would far outweigh any potential boost to exports or tourism revenues from a devaluation.
Dutch government not invited
Officials from the Netherlands, the fifth biggest eurozone economy, were not invited to Luxembourg and the Dutch government faced domestic criticism over the weekend for its exclusion.
“It is a humiliation and an insult that the Netherlands is being bypassed for talks about Greece,” anti-immigration and Eurosceptic member of parliament Geert Wilders told ANP news agency.
Former development aid minister Bert Koenders and former foreign minister Jaap de Hoop Scheffer said all eurozone finance ministers should have been included in the talks.
Dutch Finance Minister Jan Kees de Jager was assured by the French and German ministers that nothing was decided on Friday and that the Netherlands will have input into any future decisions, a ministry spokeswoman said.