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Europe Changes the Money Rules, Greece Still at Risk

Greece's interim Prime Minister Lucas Papademos in Brussels for an EU summit

European leaders have agreed to set tighter rules over spending and deficits and will pump an additional $268 billion into a new reserve structure to help ailing countries, but failed to seal a so-called grand bargain in favor of a compromise that Greece’s interim Prime Minister, Lucas Papademos, said could mean more austerity measures although he previously said more wouldn’t be imposed on Greeks crushed under waves of pay cuts, tax hikes, slashed pensions and scores of thousands of layoffs, which could turn into immediate firings.
Papademos, a former European Central Bank (ECB) Vice-President, nonetheless welcomed the agreement struck at yet another summit of leaders of the European Union as well as the 17 countries that use the euro and form the Eurozone, but said the new rules need to put into the Lisbon Treaty under which the region operates. The leaders also did not vote on whether to issue Eurobonds although he said that could be rethought
Asked whether Greece would need to take any new austerity measures for 2013 and 2014, Papademos said that it was not a foregone conclusion but might be inevitable. “If the measures for 2012 are implemented properly, there will be no need for new ones but if it is deemed necessary new measures will be taken,” he said, sounding an ominous note for worried Greeks who’ve seen similar talk turned into reductions in their income and lifestyle.
Papademos, who is heading a coalition government of former ruling PASOK Socialist holdovers, along with their bitter rival conservative New Democracy and the far Right-Wing LAOS party, said the government, which has failed to halt a slide toward economic oblivion and bankruptcy, has been “effective,” but said that his administration would need to “successfully implement the economic program” agreed with the country’s foreign creditors if it is to comply with the new fiscal rules.Greece is surviving on a series of $152 billion in rescue loans from the Troika of the EU-International Monetary Fund-ECB and hoping for $175 billion more, but that has come with demands to slash spending and bring down the country’s staggering $460 billion debt and 9.5 percent deficit, more than three times that allowed by the Eurozone.
That failed performance has created the European crisis and forced its leaders to adopt the new rules as it seeks to keep other larger economies, such as Italy and Spain from becoming like Greece. The EU and Eurozone have failed to enforce current rules against overspending and the deficit ceiling, but its leaders said that now has to change if the economic bloc is to survive. Before the meeting, former Prime Minister George Papandreou, who resigned on Nov. 11 after 18 months of protests, riots and strikes, said the EU had to share some of the blame. He said the EU has done “too little too late” to solve the sovereign-debt crisis. “We need a European, even global solution to this issue,” Papandreou said from Durban, South Africa. “We lost quite a bit of time in Europe finger-pointing,” he said, as he pointed the finger at Europe.
Responding to a question about the ECB’s role in fighting the debt crisis, Papandreou said Europe is using “too few” of the instruments available to fight the debt turmoil. “Europe has lots of tools. We have been using too few of them and too late,” Papandreou said. “What happens is they get spent, psychologically, and the market doesn’t trust we have the will. What we have to show the markets is they can trust the euro.”
The austerity measures in Greece have created a deep recession of 17.5 percent unemployment, more than 100,000 closed businesses, more than 500,000 people without any income and created a malaise. More austerity, which the Troika is demanding so that its investors, primarily French and German banks, will be repaid, will worsen the crisis, many analysts have said, because Greece has failed to go after tax evaders costing the country $60 billion in lost revenues and new figures show the country’s industrial output plunged in October. The economy is shrinking by 5.5 percent this year and a recovery isn’t expected for years.
Data released by statistics service ELSTAT showed the annual pace of contraction in industrial output accelerated from a 1.7 percent drop in September, contracting 12.3 percent in October. Manufacturing production also declined 11.9 percent. “The big drop in the October industrial output year-on-year reading reflects depressed domestic demand and slowing export activity due to weakening conditions in main trading partners” said EFG Eurobank economist Platon Monokroussos. Industrial production fell 5.8 percent in 2010 and has been in steady decline since at least January 2009.
Twenty-six of the 27 EU leaders agreed to pursue a tougher budget discipline regime with automatic sanctions for deficit breakers and 23 countries are committing to keep their deficits below 0.5 percent of GDP.
That cap can be broken to counteract a recession or in other exceptional circumstances. The European Court of Justice will make sure all states’ debt brakes are effective.  The Eurozone, together with other willing EU states, will give as much as $268 billion to the IMF to help it rescue troubled nations. The Eurozone’s permanent bailout fund, the European Stability Mechanism, will take over from the current rescue fund, the European Financial Stability Facility, one year ahead of schedule, in July 2012. Unlike the EFSF, the ESM has paid-in capital, similar to a bank, and is therefore more credible on financial markets. The ESM’s decision-making process was simplified in emergency situations, allowing struggling countries to get financial help if an 85 percent majority of capital holders agree. That is meant to stop small countries from blocking or slowing down urgent rescues, as has happened in the past.
The Eurozone eased rules that have forced banks and other private investors to take losses when a country gets a bailout from the ESM. The previous push to inflict losses on bondholders has been blamed for exacerbating the crisis. Eurozone leaders did not decide to boost the overall firepower of their own bailout funds, which is currently limited to $668 billion. They promised to reconsider that cap in March, shortly before the ESM comes into force. They did not agree to more intrusive powers for the European Commission over the fiscal policies of deficit breakers, as had been demanded by EU President Herman Van Rompuy and some nations. Instead, they promised to “examine swiftly” much more lenient proposals from the Commission, political spin that some analysts said won’t calm market fears that the EU is a political beast unwilling to rein in its profligate states.
(Sources: Kathimerini, Reuters, Bloomberg)

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