Hmm, how much time do you have?
Here goes…Greece embarked on a decade-long borrowing and spending spree after it joined the eurozone in 2001. Membership of what was then a shiny, new, strength-in-numbers currency club — notionally anchored by mighty Germany — made it so much easier to borrow from oh-so-willing banks.
No-one much noticed or cared about this kind of excess while Europe’s economy was chugging along. Freshly minted euros were splashed around (see: Athens’s shambolic 2004 Olympics), and generated little comment. But then the 2008 financial crisis took hold and suddenly ruthless markets began shaking angry fingers. Athens was revealed to have repeatedly lied to Brussels and Frankfurt — home of the European Central Bank — about its flaky national numbers which glossed over overspending, tax evasion and corruption. They’d cooked the books, and today, Greece owes almost double what its flagging economy can generate.
Connected by the euro, quite a lot of Europe — Ireland, Spain, Portugal, even core France and Italy to a degree — also ran their economies carelessly, unsustainably. Furious markets at home in Europe and abroad flayed the banks for funding this bacchanalia, which exposed systemic weaknesses that rippled across the panicky eurozone and beyond.
And Greece’s problem, politically?
You do have time to spare.
Since 2008, several governments across Europe have been ousted from office as crisis-contagious economies crumbled. Enter the EU mandarins in Brussels who, unfettered by election pressures, and persuaded by Angela Merkel’s Germany (also, until recently, by France’s Nicolas Sarkozy), begin insisting on Europe-wide austerity, prescribing economic cold turkey after years of euro-bingeing.
Back to the voters, where tough love proves unpalatable — Bonjour M. Le Président Francois Hollande! Merkel, a political survivor of the financial crisis, had been re-elected in 2009, but now she too has a bloody nose as voters across her crucial Ruhr industrial heartland only this month rejected her austerity mantra.
In Athens, a succession of recent Greek governments was felled for meekly acceding to Brussels and International Monetary Fund (IMF) demands to enact austerity. Proud though emasculated Greeks demanded consultation from their politicians, took their argument to the point of violence, even to the point of dystopia. Greece has seen riots and even protest by self-immolation; society is fracturing. When the tear gas temporarily dissipated for the recent May 6 election, more than 30 parties representing all manner of political persuasions — but mostly anti-Brussels in tone — contested the poll.
That didn’t resolve anything; it only reinforced Greek contempt for all things EU. Greece made three attempts at building a governing coalition this past week. All failed. Greeks are now so utterly riven they can’t decide who they want to govern them, or what’s best for them. Should they leap leftish or rightish? Go pro- or anti- EU austerity (or any combination thereof)? Or should they back the feisty pox-on-all-their-houses populists emerging at either extreme of the political spectrum?
As the world looks on, fretting, another Greek election has been called, for June 17, with the country under technocrat caretakers in the meantime. But, of course there is no guarantee this next poll will yield anything conclusive either. Deadlocked, the Greeks might in theory be condemned to repeat this fruitless invocation of democracy ad nauseum, which would send them even more broke, and all this as creditors hover impatiently.
The next election will be for Greece’s survival, fought around the call to leave the euro (if, by then, it hasn’t left already) and perhaps leave the EU, too. Markets crave political stability and tend to punish those that don’t have it, which means countries linked to Greece via the vulnerable eurozone are being hammered. Again. It’s the stuff of international divorce.
But didn’t Belgium, the European Union’s host nation, go without a government for 18 months?
True, but Belgians mostly have jobs, pay taxes, have a functioning civil service and aren’t in chronic recession. Nor does their country owe more than 150 per cent of its annual economic output to banks. Were Greece Belgium.
So, come on, what’s really at risk here?
In Greece, social chaos and its very democracy — a heavy irony in the country that invented the idea. Unemployment and bankruptcies are at record levels; so is suicide. It’s grim, and getting grimmer by the day.
Athens is periodically swept by rumours of military coups, which would be catastrophic for a Europe that is supposed to have politically matured beyond such extremes. This Europe aspired to be a beacon for enlightenment elsewhere, for places that increasingly matter, like autocratic Russia and China, emerging Africa and mid-spring Middle East.
The Greek meltdown is potentially a back-to-the-future moment for the world’s largest economic bloc, a stark preview of what could happen elsewhere in the continent as it implodes due to its own connectedness. Nothing less than the grand post-WW2 political-economic project, the 27-member European Union (EU) itself, is at risk, as Europeans rail against rules being made for them by bureaucrats they didn’t elect.
Will it get that far?
Improbable, but not impossible. Greece comprises just 2 per cent of the wider European population and less of its economy, so it’s expendable. And anyway, it’s becoming increasingly clear that a dominant Germany, doing relatively well, Danke schön, won’t allow the Greek cancer to spread to such a calamitous extent. Greece will be cut loose before that happens.
Greece owes foreigners $400-500 billion, almost double the size of its economy, but smaller than a decent-sized German state like, say, Bavaria, which is where the EU economy really matters. Athens’ creditors — banks and state agencies — would likely weather a Greek default and one from similar-sized Portugal, which is wobbling, too. But they’re unlikely to cop another on the chin, should six-times-bigger Italy fail to meet its commitments. After all, Italy is an original EU member and is seen as a core eurozone economy. Nor could they probably wear the default of Spain, where more than a million houses are empty and big banks are vulnerable from their 30 per cent bad-debt overhang of dodgy property portfolios. At this end of the domino game lies potential Euro-Armageddon, with the EU and IMF probably powerless to stop it.
So far in 2012, the Greek economy has contracted by an alarming 6.2 per cent. It’s the 13th backward quarter of the past 14 and Greeks simply can’t pay their bills or manage their economy according to the strict rules euro membership demands. So they risk default on their truckload of loans.
The most likely outcome of a default is that Greece will be forced to leave the eurozone, thereby quarantining its economy and protecting other member countries from further infection. Greece might then collapse Argentina-style, a mess that could take generations to correct. But delinked from Greece, the rest of the eurozone would be relatively immune. Unless another Greece emerges elsewhere.
But isn’t a chain only as good as its weakest link? Isn’t it a rock-solid Brussels tenet that member nations can’t leave the euro without also leaving the EU?
Yes, and no. Last November, Brussels reminded the world that the EU “treaty doesn’t foresee an exit from the eurozone without exiting the EU.” Six months on in this crisis, most scenario planning has Greece leaving the euro but not the EU, mostly because, as you point out, it would be catastrophic for the EU as an institution to wobble because of a minor member. Politicians are pragmatic; they know when to change their own rules.
Once a forbidden, nightmare topic, Greece’s departure from the euro is now being openly discussed by Europe’s central bankers and governments, and even by Brussels’s mandarins. In a weekend speech by the EU’s economic and monetary commissioner, Olli Rehn, Europe was described as “certainly more resilient” in the event of a ‘Grexit’ than it was in 2010 when Greece’s plight began to emerge, and the EU bloc would have been “massively underprepared”.
So really, what would happen in Greece if it exited the euro?
Greeks face an appalling choice. Clinging onto the euro means they’ll be dependent on external life support for generations, beggars to Brussels and Berlin. But leaving it could be even worse, albeit in the medium term, where it could mean economic and possibly social collapse as they wrest back control of their destiny with a new currency and their own policies.
A ‘Grexit’ from the euro would be timed to occur before a weekend, when business tends to be limited, in order to minimise the immediate shock as much as possible.
But it would be, to steal from the Greek, χάος, chaos. As Greece adjusted to its new reality, the cure could seem to be worse than the disease. There could be bank runs, and even collapses as banks were stripped by customers of lifeblood cash. Account withdrawals could be limited or even frozen, stopping meaningful economic activity and provoking anger. As businesses failed, people would be reduced to bartering. The police and the army could be deployed to maintain order, and all this in a politically divided nation that may only have a caretaker government to convince citizens to behave. As the EU’s Rehn said at the weekend “Europe also suffers, but Greece would suffer more…it would be much worse for Greece and Greek citizens, especially less well-off Greek citizens, if Greece left the euro, than for Europe.”
Creating and distributing a new currency would take about six months, then people and markets would have to adapt — if in fact they adapt. As the chaos settles, this ‘new drachma,’ so the thinking goes, would have a much-reduced value to reflect Greece’s toxic economy and Athens’ weakened ability to tap sceptical sovereign debt markets without the implicit EU guarantees that euro membership brings.
Imported goods would suddenly be massively expensive, fuelling inflation, which could further collapse dependent businesses, particularly in retail. One wouldn’t see too many Greeks wielding their flaccid currency in the world’s tourist hotspots.
But Greek goods and services, such as those associated with tourism, the country’s biggest industry, would become relatively cheap to outsiders — that is if penurious Greeks could resist abusing the European guests they blame for their plight. External demand would help kick-start the economy. Greeks would also stop buying expensive imports, and a recovery of sorts could begin. Perhaps.
What about Greek’s rich? What are they doing?
Much the same as what they’ve always done: keeping their money and assets offshore, in Switzerland, Paris, London, while declaring very little at home.
And the poor?
Jobless, they’re being fed — literally and ideologically — by reborn political populists like the neo-Nazi Golden Dawn on the extreme right and the radical left Syriza.
The middle class?
Increasingly unemployed.
How come the neo-Nazi ‘Golden Dawn’ got 7 to 8 per cent of the vote last week? Are Greeks racist?
Other than an historical antipathy toward neighbouring (and, gallingly for Greeks, bigger, booming Turkey) they’re no more racist than any other nationality. The big Golden Dawn vote was essentially a protest. Established parties are seen as corrupt, too chummy with Brussels, too quick to agree to austerity and too willing to open Greece’s doors to immigrants. (Greece is now home to as many as a million people from the poorer reaches of Africa, Asia and the Middle East — innocents now demonised as job-stealers by Golden Dawn.)
So why is Greece in the EU in the first place? Isn’t it a bit, er, ‘easterly,’ a bit foreign for (western) European taste?
Good questions, and all the more so as Islamic Turkey, once-warring Balkan states and even African Morocco line up to join the EU, while wary Nordics stay away. In something of an elongated political Kumbaya moment, Brussels’ view has been that signing up historically erratic “Club Med nations” to a united Europe means securing democracy at the continent’s vulnerable fringes, while extending internal markets.
More to the point, hard-working, tax-paying volk in functioning, conscientious places like The Netherlands and Germany, are increasingly posing these questions of their own governments which are now asking them to sign up to Brussels’ demands of austerity.
As the British historian Niall Ferguson noted this week “for two generations, the Germans really did want to take over Europe — by force. But today, when they could do so peacefully, they can’t be bothered.”
Fuelled by their own Eurosceptic populists, the “North Sea” view is that the European Mediterranean’s ‘garlic belt’ — Greece, Spain, Portugal — is a nice, sunny area to visit and even in which to own a cheap holiday home, but no place to do business or to rely on. These dour northern heartlands, including Scandinavia, have never been totally convinced that being ‘European’ is a good thing, and less so when dusky foreigners arrived and changed their quaint villages, seeking jobs and welfare that their hefty taxes now fund.
Discomfited core EU constituencies in France, Germany and Benelux find it all a bit offensive that the social contract they’ve long enjoyed, earned and paid for at home — the free health, the excellent services and infrastructure — are threatened by austerity when, as they see it, the real problem lies in less disciplined climes.
Greekonomics . . . Wow, a great summary and a thoroughly good read to boot. Of all the hot spots around the world (read Middle East, the Koreas, sub-continent) it is Europe that is still the scariest I think.
From Patrick
17 May 2012