With junk bonds,Greece is a special case
Even though the final decision is due in May, we can take it for granted that the European Commission will agree to continue easing the terms of the Stability Pact rules into 2023 and that the rule foreseeing debt below 60% of gross domestic product and the other concerning the deficit will not apply.
Inflation, which is being spurred mainly by rising fuel costs, the uncertainty affecting consumption and investments, and the slowing of the post-pandemic recovery – in the best case – are factors influencing the decisions of both the Commission and International Monetary Fund Managing Director Christine Lagarde, who, unlike the US Fed’s Jerome Powell, wants to suspend the interest rate hike until 2023.
Our European partners are coming to understand what it means to be obliged to spend a lot of money on defense
There is, of course, a new factor pushing the Commission in favor of easing and that is the decision, led by Germany, to increase defense spending. In the space of just a few days, Russian President Vladimir Putin accomplished what no American president has: Chancellor Olaf Scholz decided that Germany will spend 100 billion euros on defense this year and at least 2% of GDP in the years to come. In the meantime, French President Emmanuel Macron also announced an increase in defense spending last week.
Not only is Europe stepping up to bolster its defenses; it also appears prepared to shell out what it has avoided paying so far. That means our European partners, those champions of fiscal conservatism, are coming to understand what it means to be – like Greece – obliged to spend a lot of money on defense. And so, because of Putin, they will also come to understand the perils of a revisionist point of view when it comes to international agreements and treaties.
A continued relaxation of fiscal policy, therefore, is a positive development so long as we look at it as a means of achieving a fiscal adjustment faster. That will, in turn, improve our credit rating so that our bonds climb to investment grade from junk status, where they have remained even after three memorandums and a prolonged economic crisis. Because at the end of the day, everything rests on the international markets and not on the Commission and these are not prepared to give us any money at all right now. Funds are seeking to invest in safe bonds, which is why the yields on Greek notes keep growing while those of more reliable bonds are decreasing.
So, no matter how much slack the Commission decides to cut Europe, Greece must implement a fair yet nevertheless strict fiscal policy. Why? Because Greece is a special case: It is the only European country whose bonds are not investment grade and whose economy is only built to last in fair weather thanks to a weak productive base. Moreover, we have wasted a lot of time – a custom that has persisted in the past three years – because many among the political staff believe that managing the crisis means giving money to everyone, across the board, without discretion. The reform also went out the window, just as the Pissarides Committee report was consigned to a drawer.
