Too soon to predict that EMU will wobble
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
The budget crisis facing the Greek government has drawn an array of comments and responses from various parts of the European Central Bank, the European Commission, the International Monetary Fund and the financial markets.
Academics and economists are also keen to get their pennies worth pointing out that in effect the Greek budget was an accident waiting to happen. During the early years of the Economic and Monetary Union it was no secret that some members of the system “fudged” their numbers to comply with the budgetary criteria of the Maastricht Treaty.
Such countries should have used the good growth years to initiate structural reform and fiscal restraint which would have promoted a healthy budget. In the event that they did not it would only take a recession to uncover the cracks that had been papered over.
The opponents of EMU now have their moment. The recession arrived and countries such as Greece, Spain, Portugal and Ireland found themselves to be in deep water.
The Irish appear to be swallowing the bitter pill of austerity but remarks by the Greek PM last month that Greece was plagued by tax evasion have heightened scepticism over whether Greece can achieve its aim of cutting the budget deficit to 3 percent of GDP by 2012 (from 12.7 percent currently).
So great are the issues in Greece that talk is emerging that the country may have little practical option but to leave EMU. From an economic point of view there is validity in these arguments.
However, what these arguments overlook is that the formation of EMU was more about politics than economics and the political credibility invested in the system means that it is too early to speculate that the system would eject Greece.
Politicians would no doubt fear that discarding a peripheral country could lead to a broader collapse. That said, widespread belief that Greece will be bailed out leaves the Greek electorate with lessened incentive to accept austerity measures.
This enhances the view that Greece’s budget will remain well above 3 percent of GDP in 2012. It that is the case, the EMU may then be forced to consider changes to its system. Budget problems could remain a constraint on the performance of the euro for many months to come.