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Europe Turns Attention to Unlocking Greek Aid

By James G. Neuger and Jonathan Stearns
November 24, 2012 1:08 PM EST 22 Comments
European Union (EU) flags fly outside the the European Commission headquarters, in Brussels, Belgium.
Photographer: Jock Fistick/Bloomberg
European Union (EU) flags fly outside the the European Commission headquarters, in Brussels, Belgium.

European policy makers turned their attention to unlocking funds to keep Greece solvent after a summit failed to agree on a seven-year budget for the bloc.

Euro-area finance ministers held a conference call today to prepare for their third meeting this month, on Nov. 26, on Greece’s rescue. As with the budget talks for the 27-nation European Union, euro finance chiefs have deadlocked on a plan to steer the country back to fiscal health.

“There’s no time to waste” in finding a solution for Greece, German Chancellor Angela Merkel told reporters yesterday in Brussels. A plan “is being intensively worked on,” she said.

An agreement, which would release an aid payout of at least 31 billion euros ($40 billion), may raise Greece’s debt target to 124 percent of gross domestic product in 2020 from a previous goal of 120 percent, a Greek official said Nov. 22. The cost of reaching the new target from a currently projected trajectory of 129 percent of GDP that year is about 10 billion euros, according to the official.

The main obstacle to clearing the loans for Greece is a plan to reduce the interest rates charged by euro-area creditors. A cut in interest rates would put them below the cost of funding for some of the 17 euro-area countries, the official told reporters in Brussels.

The latest chapter in the Greek economic crisis that opened in 2009 was triggered by the ministers’ decision to extend by two years, to 2016, the deadline for Greece to cut its budget deficit to 2 percent of gross domestic product. The extra time drove its projected debt higher, stirring tensions with the International Monetary Fund. The IMF has provided about a third of 148.6 billion euros in loans funneled to Greece since 2010.

Greek Praise

European leaders have praised Greek Prime Minister Antonis Samaras’s efforts to implement austerity measures, marking a turnaround from the doubts they’d previously expressed that Athens hasn’t been holding up its end of the bailout deal.

The impasse that has held up the latest aid payment since June was echoed at the budget summit that ended yesterday.

National chiefs plan another summit early next year to forge a deal between countries including Britain and Germany that want to cut subsidies and lesser-developed southern and eastern economies clamoring for EU investment.

“Anything short of admitting that our talks have been extraordinarily complex and difficult would not reflect reality,” Jose Barroso, head of the European Commission, which manages the subsidy programs, told reporters after a two-day meeting in Brussels.

British Rebate

Britain’s defense of its cash-back guarantee and France’s clinging to farm aid gave the summit the flavor of EU negotiations in the 1970s or 1980s, diluting efforts to equip Europe with a budget to make it more competitive. Eastern and southern countries said reduced financing for public-works projects would condemn them to lag behind the wealthier north.

In the absence of an accord by late 2013, the EU would roll over its annual budget.

At stake is a spending plan for the years 2014-2020 that would total about 1 percent of EU-wide GDP. While that sum is paltry compared to the average 50 percent of GDP that each country spends inside its borders, the political resonance is far larger.

Wealthier countries such as Germany, the U.K., Denmark, Sweden and the Netherlands banded together to cut what they pay to the collective pool, pounding away at the original proposal of 1.033 trillion euros that came out in mid-2011.

Budget Cuts

By the time the leaders convened, the figure on the table was 973 billion euros. It was soon trimmed to 971 billion euros, still too much for financially stronger countries that pressed for another 30 billion euros in cuts.

The alliance of spending cutters unraveled, when it came to the financing side of the budget. While U.K. Prime Minister David Cameron defended a rebate won by Margaret Thatcher in 1984, Germany, the Netherlands and Sweden sought better terms for their own refunds and Denmark made a bid to join the money- back club.

French President Francois Hollande, for example, paired his farm-aid advocacy with calls for savings elsewhere, since France is among the 11 countries that pay more into the EU budget than they get out. As a result, agriculture was the relative winner as the leaders strengthened some budget lines and pared others.

French Check

Taking aim at Cameron’s rebate, Hollande said: “France pays more than Britain; I could ask him for a check.”

For Britain, the summit was about more than euros and cents, testing Britain’s EU influence at a time of mounting pressure for a national referendum on whether to stay in the bloc.

Demanding spending cuts at home, Cameron made a special target of the 50,000 civil servants at EU institutions ranging from the commission and European Parliament, to the Court of Justice and agencies that regulate sectors from fishing to medicines.

“More than 200 Brussels staff earn more than I do,” Cameron said. “Brussels continues to exist as if it’s in a parallel universe.”

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Jonathan Stearns in Brussels at jstearns2@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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