Michael Burke: In today's Financial Times, two economists from the Breugel think-tank in Brussels argue that the best course for Greece is to call in the IMF.
The Greek economy and financial markets are bearing the brunt of concerted pressure in the Euro Area, and there are fears that a collapse there could lead to renewed speculative pressure on a number of countries including Ireland.
The possibility of an IMF intervention ought to be shameful for the architects of Europe's fiscal and monetary arrangements, since the Euro was touted as an instrument that would protect the economies of Europe from speculative pressures. 'European Solidarity' has proved a mirage. Worse, leading EU institutions have played their part in Greece's difficulties. As the authors of the FT piece note,
"One reason why things have sharply worsened is that the ECB has said that by the end of 2010 it will tighten quality requirements for bonds pledged as collateral – which risks excluding Greek bonds from repurchase agreement operations. This, and Greece’s inability so far to present a credible fiscal plan, explains the alarm in financial markets."
This unilateral move by the ECB seems wholly misplaced. If the ECB is concerned about the deterioration of asset quality in a tiny part of its portfolio, it should make its own determination about which assets can be pledged. Outsourcing this to the largely discredited ratings agencies seems like a wholly unwarranted measure, designed to increase the pressures on a Greek government which has inherited a crisis not of its own making.
Nor is the Commission blameless, having been apparently hoodwinked over a number of years by the previous Greek governmet about the size of the deficits (and debt!) in a manner that would make a primary schoolteacher blush.
The new government has bemoaned the endemic corruption in Greek society, includig government bodies, and its effect on reducing tax revenues. Perhaps the Commission could provide greater assistance as tax collectors than as macroeconomic advisers, or even auditors. In the period 1997-2006, Greek tax revenues as a proportion of GDP were 5.5% below the Euro Area average. Even in 2008, they were 4% below the average. Closing in on the average level would make a major dent in the deficit and, once the economy recovers, the debt stock too.
This low taxation is a common feature of those Euro Area countries currently in the cross hairs of the financial markets. In 2008, Spain's tax revenues were 37% of GDP, 7.8% below the Euro Area average. By contrast, in Germany they were 43.7% and in France they were 49.3%.
Of course, in 2008, Ireland's tax revenue GDP ratio was the lowest of all in the Euro Area, at 34.9%, and fully 10% below the average (Table 36). Closing in on the Euro Area average would see Ireland's deficit melt away to nothing.