Former Canadian Prime Minister Paul Martin, who slashed his nation’s debt in the decade through 2005, said Europe needs to show Greece how austerity will pay off in the medium term to successfully push through budget cuts.
More than a year after the European Union and the International Monetary Fund extended Greece 110 billion euros ($157 billion) in aid, the region’s finance ministers meet today to discuss the nation’s debt crisis as the turmoil afflicting it shows signs of spreading. Greek bonds fell last week, pushing the yield on the two-year note to a euro-era record, while Spanish, Portuguese and Italian bonds also dropped.
Martin, in an interview yesterday in Aix-en-Provence, France, said that setting out a medium-term financial plan is as important to gain support from the population as it is for financial markets. He was Canada’s finance minister from 1993 to 2002, and he became prime minister in 2003.
The Greek government is “essentially saying ‘cut’ and the rest of the world is saying, ‘it ain’t going to work, you’re not going to be any better off,’” Martin, 72, said. “That’s hugely important.” As a citizen, “why would you go through with those cuts? What Europe has got to do is provide an endgame.”
The region’s sovereign-debt crisis will dominate today’s Brussels meeting. It will be preceded by a gathering including EU President Herman van Rompuy, European Commission President Jose Manuel Barroso, European Central Bank President Jean-Claude Trichet, Luxembourg Prime Minister Jean-Claude Juncker and European Economic Commissioner Olli Rehn.
European leaders are prepared to accept that Greece should default on some of its bonds as part of a new bailout plan for the country that would put its total debt levels on a sustainable footing, the Financial Times reported, citing unnamed senior officials. The ECB wants to expand the EU’s rescue fund to allow for providing aid for Italy, according to a preview of an article published today in Die Welt.
Moody’s Investors Service said in a report today that European government calls for banks to share in bailing out Greece are a “credit negative” for nations unable to access market funding.
The EU forecasts Greece’s debt burden to rise to 158 percent of gross domestic product this year from 143 percent in 2010. Canada’s total government debt peaked at 101 percent of GDP in 1996 and fell to 71 percent in 2005, the year Martin left office, IMF data show. Canada’s federal government debt dropped from more than 70 percent of output to about 35 percent in that same time, according to Finance Ministry data.
In Martin’s experience, the hardest moment in any debt-reduction effort isn’t pledging cuts, but implementing them.
“The objection to acting doesn’t necessarily take place when you announce, it’s when the cuts begin to be felt,” Martin said. “A lot of the people that support you, support you on the grounds that it’s going to be everybody else but me. And when it starts to happen you really get hit.”
Martin criticized a proposal floated by French banks that would see Greece’s interest rate on privately held debt increase if growth picks up.
“They’re saying to the Greeks ‘we’ll reduce your interest rate but once your economy turns around we want those interest rates to go up,’” Martin said. “It should be exactly the reverse. It’s, ‘we’re going to bring your interest rates down and as you start to come out of this we’re going to keep them down until such time as you are solvent.’”
The key for governments facing high deficits, including both that of Greece and the U.S., is setting targets and meeting them, “come hell or high water,” Martin said.
“The endgame in the U.S. is going to be a much longer, minimum 10 years,” he said. “You’re going to have to say we’re going to do it in 10 years and here are my annual targets. With targets there are no excuses.”
Europe’s effort to set constitutional limits on deficits, as Germany has done and as France is in the process of doing, may not be the most productive approach, said Martin.
“That doesn’t work,” he said. “You’re far better to have a commitment from the government to the people. That scares the hell out of the government. The problem with balanced budget legislation is, the debate becomes changing the legislation and people turn off.”