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The debt crisis that started in Greece has become a problem of the entire euro area. Today, the Euro leaders focus on how Brussels to cope with the possible financial dominoes in countries that use the same currency, but have different financial and economic policy. The guarantees Finland required from bankrupt Greece in order to take part in the aid would turn the recovery plan upside down.

About this and other problems arising in the European area as a result of the Greek crisis GRReporter talks with the Professor of European Politics and Economics at the University of Athens, George Pagoulatos. In his opinion, if the euro zone is willing to emerge from the current debt crisis with no significant damage and prevent other market blockages, Brussels should give the green light to Eurobonds. This change would significantly bring down the price of total lending to member countries, but they will have to accept a much tighter fiscal policy, dictated by the heart of the zone. Following the principle of interconnected vessels, the states should refrain from both high deficits and disproportionately high primary budget surpluses.

To be continued

What are the benefits for Greece from the agreement with Finland to give guarantees against the involvement of the Scandinavian country in the financial aid?
 
Greece does not benefit from this agreement in any way. A more important question is whether it could be avoided. The truth is that Finland's request for additional guarantees was written in the Eurogroup agreement for European aid of 21 July this year as a condition the state to take part in the rescue program. It was, therefore, very difficult to avoid what followed. What is important is the request of guarantees as a condition for participation in the rescue program for Greece not to spread to other countries such as Austria and the Netherlands, which have made such requests. It seems that this issue will be solved at the euro area level and other countries will not request guarantees, mainly because this request for guarantees renders the logic of the decisions of 21 July this year.

If Greece was able to give certain guarantees it would not need help, right? In this sense, don’t you think that Brussels had to intervene earlier in the debate on the guarantees and put pressure on the states that want money from Greece (Finland in this case) to participate in the bailout?

All this is a very sensitive issue and we are referring to something that is not quite clear yet. There are no clear limits to where the euro area and the European Union could put pressure on a particular Member State, which like many other states has very strong internal political opposition and the government decisions depend on a Euro-skeptic party, as is the case with Finland. Such decisions are taken unanimously. The best that could be achieved within this type of voting is a consensus, but if certain conditions, which have been officially recorded in the consent, protect one state from the consensus, the opportunities for pressure from Brussels are extremely low.

Do you support the idea of ​​issuing Eurobonds, which will serve to fund the entire euro area? Could you explain the positive and negative features of this type of funding?

The most important advantage is that it significantly reduces the cost of lending to all countries in the euro area, because it reduces the market fluctuations in the future of different countries. Eurobonds would stop the vicious circle of doubt which hit several countries one after another and threatens to drag others into this crisis. When the markets doubt the ability of a country to service its foreign debt, the interest on their current loans begin to rise. At some point, this trend is increasing and there comes a time when the rates achieved make the external borrowing impossible for the individual countries. This did not happen only in Greece but also in Portugal and Ireland. The problem does not end there. Spain and Italy also feel some pressure. Therefore, the Eurobonds would immediately solve the problem with this type of pressure.

The euro area is in an extremely favourable position if it decides to issue Eurobonds. It will be able to create a new market of Eurobonds, which will have extremely long duration and high liquidity, which will significantly decrease the price of lending to euro area countries. In other words, the interest on total lending with the new securities will reach even the cost of lending to countries with the highest credit rating, as Germany and France.

Here comes the problem, which some analysts anticipate. The Eurobonds could increase somewhat the cost of lending to blue zone countries. On the other hand, if we calculate the price for the use of all debt crises in the periphery of the euro zone, the Eurobonds could turn out to be a much cheaper way to solve these problems.

The main concerns with this type of utilization of the debt crisis in the euro area are connected with the idea that this decision could encourage the macroeconomic relaxation of countries with financial problems. It is, therefore, extremely important the decision for Eurobonds to be accompanied by a new type of economic and financial governance of the Union. It is possible to introduce legislation and constitutional amendments to establish these new rules in the Member States as provided by Germany and France. In this situation, I would recommend a much closer monitoring of the economic developments across the euro area so that there are no serious deviations.