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EU leaders unite on Greece support plan -

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EU leaders unite on Greece support plan

Peter Ryan reported this story on Friday, February 12, 2010 12:21:00

ASHLEY HALL: European leaders have struck a deal designed to stop Greece from defaulting on its

They've agreed to take coordinated action if necessary to stabilise Greece and to restore
confidence in the 16-nation euro currency which has been sliding because of the uncertainty.

The details of the support strategy are yet to be released but the European Union is expected to do
whatever it takes to prevent a contagion spreading to other members under similar debt pressure.

There are concerns that without a bailout, Greece might be forced to leave the EU and go back to
its old currency, the drachma.

Here's our business editor Peter Ryan.

(Sound of person speaking in Greek at rally)

PETER RYAN: "Solidarity to the end" - the war cry from protesters unhappy about the Greek
Government's austerity measures to ease its sovereign debt crisis.

Plans for a public sector wage freeze and a lift to the retirement age underscore the potential for
social unrest in Greece which is already regarded as an economic basket case.

With European monetary union under threat of disintegration, EU leaders meeting Brussels had little
choice but to act.

The EU president Herman Van Rompuy flagged the possibility that euro zone nations might have to
foot the Greek debt bill, not to save Greece but as a matter of self interest.

HERMAN VAN ROMPUY: Your area member states will take determined and coordinated action if needed to
safeguard financial stability in the euro area as a whole. The Greek Government has not requested
any financial support.

PETER RYAN: The Greek Prime Minister George Papandreou was smiling for the cameras today. His EU
colleagues might be sceptical but he says Greece can solve its own problems.

GEORGE PAPANDREOU: I would like to make it very clear: We have submitted a very specific stability
and growth program to the commission which has been approved by the commission. And we are
absolutely decided to make sure that it is implemented in every detail.

PETER RYAN: The EU will carry out its first progress assessment in March. But will that be enough
time to restore confidence in the euro and to stop a debt domino effect that could go from Greece
to Portugal, Ireland, Italy and Spain?

RUTH LEA: I think the euro project is under severe threat. It's not just what is happening to the
Greek markets at the moment but what will happen to Greece.

PETER RYAN: Dr Ruth Lea from the Arbuthnot Banking Group worries that without stabilisation the EU
could be split economically, socially and politically.

RUTH LEA: It looks to me as though this economy and Spain and Portugal and to some extent Ireland
could be in almost permanent recession until something very dramatic takes place.

Under those circumstances you do not have a happy single currency union. It is quite clear to me
that these economies do not make an optimal currency union and at some point something will crack.

PETER RYAN: Westpac senior international economist Huw McKay says smaller and weaker EU economies
might soon learn they can't ride on the EU's coat tails.

HUW MCKAY: A lot of the peripheral states have really absorbed most of the benefits of the currency
union and they're now starting to see the realities of the trade-offs that come with those

PETER RYAN: Huw McKay says there's no doubt that the euro's status has been damaged by the Greek

HUW MCKAY: I do think that the euro is going to really suffer some internal soul searching over the
medium term. I don't think that it is prone to collapse but I do think that the euro's status as a
clear alternative reserve currency to the US dollar has actually suffered a serious setback from
this incident.

And therefore I think we will find that the managers of foreign exchange reserves around the world
will find less reasons to allocate existing holdings towards the euro.

PETER RYAN: The worst case scenario for Greece is that it's refused a bailout and left to fend for

So could Greece leave the EU and go back to its old currency, the drachma?

Huw McKay says the possibility can't be ruled out.

HUW MCKAY: If Greece was left to sway in the breeze it is possible that they could take that
extreme position, choose to exit the euro zone and go back to a Greek currency, the old drachma,
and they would try and devalue it. And they would have no problems doing that because people
certainly wouldn't want to buy it.

ASHLEY HALL: Westpac's senior international economist Huw McKay ending that report from our
business editor Peter Ryan.