Greece and the Threat to the Euro

I read time and again, for instance here, that Greece’s debt crisis “threatens the euro”. Indeed, there are lots of right-minded people around Europe who worry deeply about this threat and have determined that a Greek default has to be avoided to save the euro. I’m having trouble, however, figuring out what that this is supposed to mean.

There seem to be different interpretations of what the “threat to the euro” is. The more dramatic interpretations invoke the idea of an existential threat. Others view it as involving reputational harm. I’ll take each of these ideas in turn.

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The functioning and resilience of cross-border funding markets

This new CGFS study provides an interesting analysis of the difficulties in cross-border funding markets during the crisis, especially in relation to foreign-currency positions.

Extreme Contagion

Both Donogh Diamond on last night’s Prime Time and Simon Carswell in this morning’s Irish Times provide useful overviews of the “Anglo options”.  But there is a certain surrealness to the discussion.  Behind the debate is what might be called an “extreme contagion” view of default on any bank liabilities.  Investors have done a good job convincing the government that bad things will follow any imposed losses.   This supposes some combination of backward-looking and grudge-holding market participants.   It also seems to be based on the idea that Irish borrowers operate in narrow segments of the international debt markets, and investors there must not be annoyed under any circumstances.  The media has taken the view that we can’t know what the consequences of loss imposition would be, so we should probably play it safe.  

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The EU Statement on Greece

Here is the text issued by the EU leaders:

We reaffirm that all euro area members must conduct sound national policies in line with the agreed rules and should be aware of their shared responsibility for the economic and financial stability in  the area.

We fully support the efforts of the Greek government and welcome the additional measures
announced on 3 March which are sufficient to safeguard the 2010 budgetary targets. We recognize  that the Greek authorities have taken ambitious and decisive action which should allow Greece to regain the full confidence of the markets.

The consolidation measures taken by Greece are an important contribution to enhancing fiscal
sustainability and market confidence. The Greek government has not requested any financial
support. Consequently, today no decision has been taken to activate the below mentioned
mechanism.

In this context, Euro area member states reaffirm their willingness to take determined and
coordinated action, if needed, to safeguard financial stability in the euro area as a whole, as decided the 11th of February.

As part of a package involving substantial International Monetary Fund financing and a majority of European financing, Euro area member states, are ready to contribute to coordinated bilateral loans.

This mechanism, complementing International Monetary Fund financing, has to be considered
ultima ratio, meaning in particular that market financing is insufficient. Any disbursement on the
bilateral loans would be decided by the euro area member states by unanimity subject to strong
conditionality and based on an assessment by the European Commission and the European Central Bank. We expect Euro-Member states to participate on the basis of their respective ECB capital key.

The objective of this mechanism will not be to provide financing at average euro area interest rates, but to set incentives to return to market financing as soon as possible by risk adequate pricing.  Interest rates will be non-concessional, i.e. not contain any subsidy element. Decisions under this mechanism will be taken in full consistency with the Treaty framework and national laws.

Ireland not so “networked ready”

The World Economic Forum has released its latest Global Information Technology Report, highlighting the “Networked Readiness Index”. I do not know what that means, but it probably has something to do with the Smart Economy, the government plan that is mentioned in the introductory chapter of the report. Ireland ranks 24th, towards the bottom of the rich countries and at par with the best of the middle-income countries.

The index consists of 3 subindices, each consisting of three subsubindices, derived from a total of 68 indicators.

As everything depends on the arbitrary weighting of the indicators, it is more instructive to look at the bottom level indicators.

Ireland is 24th out of 133 assessed countries. What is dragging us down? I’ll list the indicators on which Ireland is 48th or lower:

  • Burden of government regulation: 74th
  • Intensity of local competition: 49th
  • Time to enforce a contract: 60th
  • Residential telephone connection charge: 92nd
  • Residential telephone subscription: 118th
  • Fixed telephone line tariffs: 52nd
  • Business telephone connection charge: 76th
  • Business telephone subscription: 92nd
  • Availability of new telephone lines: 53rd
  • Government prioritization of ICT: 63rd
  • Government procurement of ICT: 59th
  • Importance of ICT to government vision: 56th
  • Government success in ICT promotion: 64th

There is no need to comment on the above.

Ireland scores well on a number of things (12th or higher):

  • Judicial independence: 9th
  • Number of procedures to enforce a contract: 1st
  • Level of competition: 1st
  • Quality of education: 8th
  • ICT imports: 1st
  • ICT exports: 10th