French President Nicolas Sarkozy and German Chancellor Angela Merkel
Say goodbye to the European Union as half-a-billion Europeans know it.
By pledging to come to Greece's rescue, the EU did something it has never done in its 53-year history, and certainly never in the 11 years of the euro's existence: extend a financial lifeline to a sovereign member of its club.
Greece's out-of-control spending triggered a debt crisis that, left unchecked, would almost certainly bankrupt the country and generate a financial maelstrom in other ailing EU economies, threatening the viability of the euro itself.
The message from the EU leaders who drafted the rescue plan was direct: No country that uses the euro will be allowed to go bust because the monetary union is sacrosanct. The 16 EU countries that use the euro have a "shared responsibility," EU president Herman Van Rompuy said Thursday in Brussels.
The promise to save Greece from defaulting on its debt sends the EU off in a new direction.
Since the European Economic Community, the EU's ancestor, was created by the Treaty of Rome in 1957, each member country has been accountable for its own financial health. The launch of the euro did not change this principle, at least not until Greece's largely self-imposed financial wounds turned critical in recent months.
From now on, it appears, the strongest countries, notably Germany and France, will guarantee the financial stability of the weakest.
In time this can only lead to the erosion of economic and political sovereignty among the countries that use the euro.
In a recent note, Russell Jones, a strategist with Royal Bank of Canada's investment arm in London, said: "The historical fact [is]that no monetary union has survived without political and fiscal union."
The announcement of the rescue plan, rumoured for weeks, came a day after a civil servants' strike shut down schools, airports and other public services across Greece in protest of the socialist government's austerity plans. No details of the plan were released on Thursday; they may not come until euro zone finance ministers meet in Brussels on Monday.
"There is an accord," Jose Manuel Barroso, the president of the European Commission, the EU's executive arm, told reporters in Brussels. "Greece won't be left alone, but there are rules, and these rules must be adhered to."
Greece's rescue may not be needed; the EU leaders stressed that Greece had not asked for it. And the support provided so far is largely statements by officials, rather than concrete moves.
But if a rescue has to be launched, it would probably take the form of loans or loan guarantees from individual euro zone countries, based on their relative economic size. The International Monetary Fund would offer technical expertise, but no direct financial support.
Investors and strategists welcomed the news of the rescue plan. "Once is it is clear that the [European Monetary Union]will not abandon any member, we believe the crisis will fade," said UBS strategist Katherine Klingensmith.
But the markets were underwhelmed by the lack of detail, and possibly by lack of conviction that Greece's government, led by Prime Minister George Papandreou, will hold up its end of the bargain. It has promised to rein in spending by freezing public servants' wages, reforming pensions, raising fuel taxes and other measures. Last year, Greece's budget deficit was 12.7 per cent of GDP, the widest in the EU and more than four times greater than the EU's 3-per-cent limit.
Stocks and bonds made tepid gains Thursday, but the euro sank almost 1 per cent against the dollar shortly after the EU leaders announced their commitment to support Greece.
The question is whether the Greek government has the political will to keep a tight austerity plan in place for several years. Wednesday's strike may be the first of many. Another general strike is planned for Feb. 24. In a note published last week, UBS economists said: "We think that there is a risk, in the near future, to have social unrest which eventually could push the Greek government to cancel or simply water down the [austerity]plan."
But others think that Greek workers - the country of 11 million has some 700,000 civil servants at the national level - know their country faces ruin unless sacrifices are made.
"We have an opportunity to change," said Constantine Katsigiannis, the Athens business lawyer who is president of the Hellenic-Canadian Chamber of Commerce. "We have our back against the wall, big time. There is nowhere to go."
He fears, however, that any EU-directed rescue on its own will not cure Greece's main problem - lack of competitiveness. For Greece to thrive, it needs structural reform, such as shrinking the bloated bureaucracy and streamlining regulations. "Any cuts that take place aren't serious unless they are combined with serious economic reform measures," he said.