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Europe's blame game

By MARTIN WALKER, UPI Editor Emeritus   |   June 10, 2013 at 12:06 AM   |   Comments

LONDON, June 10 (UPI) -- Casting blame for the Great Recession used to be easy when everyone agreed it was all the fault of the bankers. But now the regulators and officials are blaming each other and the real issues are coming to the surface.

There has been an underground war of whispers for some time, with the European Commission and European governments sniping at each other's approach to the euro crisis. But now the real tension has burst into the open with the International Monetary Fund arguing that the Europeans got them themselves into this mess and persisted for political reasons it making it worse.

"Earlier debt restructuring could have eased the burden of adjustment on Greece and contributed to a less dramatic contraction in output," says last week's IMF report, which criticizes the eurozone governments for their protracted delays in tackling Greece's debt problem. This ended up costing them much more money, the 50-page IMF report states.

"The delay provided a window for private creditors to reduce exposures and shift debt into official hands. This shift occurred on a significant scale and left the official sector on the hook," says the IMF.

The IMF accepts some of the blame, for swallowing the over-optimistic Greek and eurozone estimates of the likely effects of the crisis. After five years of recession the Greek economy has contracted 23 percent. The IMF had projected it would shrink 5.5 percent. But the demand for draconian spending cuts by the Greek government wasn't the only reason for the near-collapse.

"Confidence was also badly affected by domestic social and political turmoil and talk of a Greek exit from the euro by European policy-makers," the IMF says.

"The EC, with the focus of its reforms more on compliance with EU norms than on growth impact, was not able to contribute much to identifying growth enhancing structural reforms," the IMF reports adds.

The commission's head of economic affairs, Olli Rehn, issued his own rebuttal Friday, saying, "I don't think it's fair and just (for the IMF) to wash its hands and throw the dirty water on the Europeans' shoulders."

Rehn flatly denied the IMF suggestion that the commission, along with Germany and France, had opposed efforts by the IMF to agree an early restructuring of Greece's debt and accused the current and previous IMF leaders of rewriting history.

"I do not recall Dominique Strauss-Kahn calling for an early restructuring of Greek debt but I do remember Christine Lagarde opposing it," he said.

The problem for the future is that these guys have to get along. Officials from the Commission, IMF and the European Central Bank make up the troika, the body that manages the eurozone's other bailout packages for Ireland, Portugal and Cyprus, and which may also have to intervene for other countries. For them to have a public brawl over who is to blame for Greece undermines their credibility elsewhere. It will also make it tougher for them to work together.

ECB President Mario Draghi tried to calm the row and appealed to everyone to stop fighting about the past and look ahead.

"We tend to judge things that happened yesterday with today's eyes," Draghi said. "Three to four years ago when the adjustment in Greece was discussed -- the situation was very different, there was very high volatility, risk of contagion to other countries very high. So why don't you look forward and take stock of positive route taken?"

Draghi is right but even he misses the core problem: that the structure of eurozone governance wasn't fit for purpose. No early bailout was possible because the European treaties that established the euro introduced a no-bailout clause in order to reassure German governments that their voters wouldn't be left responsible for the debts of others.

The French and German governments resisted the idea of a Greek bailout, almost until the day they finally accepted in May 2010, that there was no alternative and by then the problem had grown much worse. They also insisted there would be no write-downs of Greek debt (since at that time French and German banks would take the biggest hits) until last year when they had to bow to the inevitable even as the Greek economy was cratering. By the then the banks had offloaded most of their Greek debt onto the public sector.

The causes and effects of the crisis should probably be left to the historians. But the politicians need to reflect on their own roles. By refusing bailouts for fear of the political backlash at home, the French and German governments ended up with a bigger problem and a bigger bill for their voters.

© 2013 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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