Europe Economy

As EU Waffles, Greece Boils Down to Credibility

Crisis meeting follows crisis meeting on resolving the debt debacle in Greece, but it seems solutions and even resolutions are hard to find.

Once again, European Union finance ministers converged on Brussels to debate how Greece might pull itself (or be pulled) out of the present pit of debt and dwindling credibility and, once again, they did no more than postpone real decisions.

Greece is being granted another grace period -- if "grace" is the right phrase in this context -- of 30 days to convince its fellow EU members (and presumably the all-important markets) that it will get its finances back on track.

Another 30 days to stand up and deliver, or else.

Or else what? That seems to be the big question. The threat of "sanctions" has for the first time wafted through the EU corridors as EU finance ministers expressed their concern that present Greek austerity plans might not be enough to put the country back on level footing and at least close to anything that resembles the criteria of the Maastricht Stability Pact.

"This is quite an urgent situation," Swedish Finance Minister Anders Borg said. "What we have seen so far is not enough. We need more steps when it comes to taxes and ... expenditure, if they want to build credibility in the market."

But just tightening the thumb screws more and more on Greece is not without its dangers. Already the Greek government is facing growing rumblings of social unrest at home, with protest and strikes gathering momentum. And the last thing either the EU or indeed bedraggled Greece need now is a government crisis on top of the more-than-alarming debt crisis.

Who Do the Markets Believe?

Ultimately, it all boils down to the credibility issue.

With - as Borg called it - "basically fraudulent" accounting, Greece lost its credibility in the markets and with its EU partners. And that might be far more difficult to restore than its finances. What Greece needs most it what it seems nobody is giving her now: time and faith.

Angelo Cavalli | Photodisc | Getty Images

Greek Finance Minister George Papaconstantinou appealed for patience at Monday's euro-zone meeting and suggested it may take more than last Thursday's verbal support pledge by EU leaders to curb market speculation that not only threatened Greece.

"We need time to put our austerity program into action," he insisted. "And then it needs time to start working."

True. But you know the markets. Patience and time is never what they like to hear. They always want solutions now, if not tomorrow.

Jean Claude Juncker, Luxembourg's prime minister and chairman of Eurogroup, voiced some of the vexation many of his colleagues share.

"We shouldn't accept to be the target of financial markets," Juncker said. "I am concerned by this irrational way of behaving of financial markets."

Squeeze Out Speculators?

One pragmatic approach to the debt debacle (as an instant flanking measure to the Greek austerity plans) would be a concert party to squeeze out speculators in the credit default swaps (CDS) market. Like with Ireland and then with Austria last year, it's the merry speculation in CDSs that drove Greece onto the brink of the present abyss.

Squeezing speculators out by collectively mopping up Greek debt would sink speculation very fast and very successfully and might take some pressure of Greece and off the euro.

But let's face it, since this crisis broke, the EU has been caught between the rock and the hard place over Greece. On the one hand, Europe cannot start writing blank checks for deficit sinners. On the other hand, it can certainly not afford to let any EU member head into default.

And while EU leaders keep pondering all-round unpleasant alternatives, the markets are determined to test their mettle.

And here lies the real fire test for Europe, the EU and the euro: to not be bullied by the markets into quick fixes that might lead to almost quicker regrets, but by the same token demonstrating to Greece (and other overspenders) that the Maastricht Pact is not just a piece of paper, but a real contract.

It's not an easy task. But when were European matters ever easy?