St. Petersburg Economic Forum and EU Bitter Predicament

St. Petersburg Economic Forum and EU Bitter Predicament

The St. Petersburg International Economic Forum (SPIEF) has kicked off on June 18 against the background of economic woes faced by Europe. While being focused on anti-Russia punitive measures, the EU is losing control over European economy. President Donald Tusk convenes a Euro Summit on Greece Monday, June 22. He said the failure of EU finance ministers on Thursday, June 18, evening to agree a deal to release desperately needed bailout aid meant it was now time to «urgently discuss» the Greek crisis «at the highest political level».

The chance to reach an agreement is slim. Pressure was also raised on Greece earlier on Thursday, June 18, when the head of the International Monetary Fund (IMF), Christine Lagarde, warned there was «no period of grace» for Greece over its impending debt repayment deadline. She said Greece would be in default on its loans from the IMF if it failed to make a €1.6bn (£1.1bn; $1.8bn) payment on 30 June. Before that the International Monetary Fund said it was halting bailout talks with Greece in a stark signal of its exasperation about a lack of progress toward a deal to avert a Greek default, as European leaders suggested negotiations were nearing their endgame. «There are major differences between us in most key areas», said IMF spokesman Gerry Rice in an unusual public statement aimed at heightening pressure on the left-wing government of Prime Minister Alexis Tsipras. «There has been no progress in narrowing these differences recently», he said. «Thus, we are well away from an agreement». He added that the IMF team negotiating with Greece had been pulled out of Brussels, though the fund remained ready to resume talks. «The ball is very much in Greece’s court right now», he said.

Standard & Poor's lowered the rating of Greece's biggest four banks on Friday, June 19, two days after cutting its already deep-junk rating for Greek bonds. «The downgrade reflects our view that Greek banks will likely default within the next 12 months in the absence of an agreement between the Greek government and its official creditors while the end of the extension of the current program is approaching», the ratings agency said.

What consequences will the European Union face in case of default? The organization will have to admit the fact of failure to solve the problem. June 30 is a special date for Greece and the EU. The eurozone portion of Greece’s €245 billion ($275.6 billion) bailout expires June 30, the same day it faces a €1.6 billion payment to the IMF - which it won’t be able to make without a new aid transfer. So far the attempts to bail Greece out ended up in failure: Greece is facing a default, the European Union urgently called a summit and the prospects for eurozone itself are uncertain. Greece’s central bank warned Wednesday, June 17, that failure to clinch a deal with international creditors on desperately needed funding could lead the country into an «uncontrollable crisis». «A manageable debt crisis, as the one that we are currently addressing with the help of our partners, would snowball into an uncontrollable crisis, with great risks for the banking system and financial stability» if a deal doesn’t come through, the report said. That could bring a deep recession, a dramatic decline in income levels, an exponential rise in unemployment and a collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership, the report added.

Even if the report prepared by the Greek Central Bank is an attempt to exert pressure on the European Commission, the European Central Bank and the International Monetary Fund the situation is still really grave.

Jeffrey Sachs, Director, Earth Institute at Columbia University, believes that Europe's demands - ostensibly aimed at ensuring that Greece can service its foreign debt - are petulant, naive and fundamentally self-destructive. In rejecting them, the Greeks are not playing games; they are trying to stay alive. According to him, «Conditions in Greece today are reminiscent of those in Germany in 1933. Of course, the European Union need not fear the rise of a Greek Hitler, not only because it could easily crush such a regime, but also - and more important - because Greece's democracy has proved impressively mature throughout the crisis. But there is something that the EU should fear: destitution within its borders and the pernicious consequences for the continent's politics and society».The American economist comes to the conclusion that «Unfortunately, the continent remains split along tribal lines. Germans, Finns, Slovaks and Dutch - among others - have no time for the suffering of Greeks. Their political leaders tend to their own, not to Europe in any true sense. Relief for Greece is an especially fraught issue in countries where far-right parties are on the rise or center-right governments face popular left-wing opposition».

Summing it all up here’s what we have: about €250 billion euros have gone down the drain, the collapse of eurozone is looming and a ghost of new Hitler appears to show up at the horizon. It’s no better at the «eastern front». In the run-up to the EU June 25-26 summit, Die Welt reported the Europe may face huge losses if the anti-Russian sanctions continue. The European Union could lose up to €100 billion ($114 billion) due to the anti-Russian sanctions if things remain unchanged, a study by the Austrian Institute of Economic Research revealed Friday, June 19. Die Welt newspaper reported that the research, conducted exclusively for the Leading European Newspaper Alliance (LENA), considered the worst-case scenario, if the sanctions remain in place. «If the situation does not change fundamentally, our most pessimistic scenario will come true», one of the research authors Oliver Fritz was quoted as saying by Die Welt. According to the calculations, current political situation can also affect over 2 million EU jobs because of the declining exports. In contrast to the analysts’ forecast, the European Commission said that the losses incurred by the European Union were «relatively small and manageable», the newspaper points out. [1]

According to Die Welt, the conclusions of the Austrian Institute are much more pessimistic than the estimates made public by European Commission which says that the damage from the sanctions war is insignificant and easy to make up for. The German newspaper believes that the European Commission makes a short-term forecast while WIFO experts take a look into a far more distant future.

According to WIFO’s assessment, Germany will shoulder the main burden. A total of 500,000 jobs are under the threat of liquidation in Germany now. The German economy will lose €27 billion and its GDP will contract by 1% in the coming years, according to experts’ estimates. Italy will lose over 200,000 jobs and 0.9% of GDP while France’s losses will amount to 150,000 jobs and 0.5% of GDP. Poland, Estonia and Spain will suffer too. Germany has already lost 175 thousand working places with 290 thousand more to be lost in case the sanctions war continues. Unemployment rate may increase by 185 thousand in Poland, 135 thousand in Italy, 115 in Spain, 95 thousand in France, 80 thousand in Great Britain and 75 thousand in Estonia. Together with Switzerland the European Union has already lost 950 thousand working places. With the sanctions in force unemployment will increase by 1 million 460 thousand.

These facts prove that the European Union faces the system’s political and economic crisis with its leaders unable to control the situation. Many far-sighted and sober-minded European politicians and businessmen set eyes on the East. The discussions at the Saint-Petersburg’s event prove this fact too.

(To be continued)

[1] Die Welt, 06. 19. 2015