Europe’s patience with Greece has run out. For a time yesterday, Athens’s exit from the euro, and the EU itself, was discussed openly
CONFUSION OVER Greece overshadowed everything yesterday as world leaders gathered in Cannes for talks on the global economy. Amid a welter of conflicting signals about the fate of Greek prime minister George Papandreou and his apparently crumbling administration, no one seemed to know what was going on.
It’s been that way for days. Whatever the eventual outcome of the turmoil, it is clear enough now that Greece’s debt crisis has entered a volatile new phase. As with every other episode in the drama, what happens next will bear down heavily on all other members of the single currency.
Papandreou’s referendum plan stunned his international partners, prompting a dire ultimatum from euro zone and IMF leaders that Greece would lose an €8 billion loan if the plebiscite was rejected. They also directed that Greeks vote on whether they should stay in the euro or leave.
In doing so, the European powers raised the spectre of Greece’s departure from the single currency. For many hours yesterday it was unclear whether the referendum would proceed but the mere suggestion of a referendum prompted open contemplation by the European powers of the exit option, marking yet another turning point in the crisis.
In two years of relentless turmoil, the idea that Greece might make its excuses and leave was anathema in Europe. No longer. The costs would be enormous for Greece, and the contagion risks for everyone else very grave.
However, the notion that the 17-country euro zone must remain intact to the last is no longer sacrosanct. Highly risky it may be, but it is not off limits.
Luxembourg’s premier Jean-Claude Juncker, one of the euro’s founding fathers, said the EU authorities were “absolutely prepared” for the possibility that Greece might abandon the currency.
“We would like Greece to remain a member, but we’re not saying Greece has to stay a member at all costs,” he said yesterday on German television.
“I’m decidedly of the opinion that everything must be done to prevent one euro member unlatching itself from the chain. But if that were the wish of the Greeks, and I feel it would be wrong if that was their desire, then we can’t force them to their happiness.”
In the scheme of things this is very significant. As the Greek body politic tears itself apart over an increasingly contentious austerity blitz, Europe’s patience is running out rapidly. With Italy, Spain and now France in the line of fire, the febrile scene in Athens makes a difficult situation worse by the day.
The referendum now seems unlikely to be held following Papandreou’s U-turn yesterday after his drubbing by Sarkozy and Merkel. Yet it is hard to imagine that there won’t be an election in Greece at some point in the near future. Given the force of public anger at the bailout, it may well be that some Greek parties see purchase in campaigning for an exit. Whether they would spell out honestly the financial pain that would inflict on the Greek people is open to question.
As for the technical feasibility of an exit from the euro, this is not really a problem. The argument goes that a political system capable of creating a currency for 17 countries – for all its flaws – should have no trouble creating a currency for one.
The real challenge, however, is the increased danger of contagion. If the threat linked to last week’s plan for a “managed default” by Greece was already severe, the advent of a “new drachma” or some such currency would magnify the risks several-fold.
The new Greek money would have to have a very low value if it is to give the country an opportunity to regain the potential for economic growth. That, however, would make it even more difficult to repay the country’s mountainous national debt.
As a result, a fully fledged default would be hard to avoid. This would herald much bigger debt “haircuts” than contemplated under the latest EU-IMF plan. Unlike in the current scheme, there would be questions over the repayment of Greece’s bailout loans. Greek banks would be doomed to fail, with deposits held in them lost.
The upfront costs, therefore, would be great, as would the risk of a dangerous spillover. The rot would hardly stop in Greece. Indeed, the story of the debt crisis shows that every piece of bad news in one weakened country implicates the next. This would be all the more so in a euro exit scenario, as any departure would be seen by markets as a precedent setter.
In that event the strengthening of the “firewall” in the euro zone bailout fund and the reinforcement of the banking sector would be crucial. Such initiatives continue to present a big political challenge to EU leaders, but they would be absolutely essential.
Without them, the potential for chaos is clear. Despite Ireland’s best efforts to avoid any default and stay in the single currency, the danger would be that the State is simply swept away by the tide. The big weak point remains the colossal bank debt. However, the risk of a global recession in the event of a disorderly Greek default would also hamper Ireland’s recovery effort.
With all of that in mind, it is no surprise that Europe’s leaders would much prefer to keep the euro zone together. The only feasible means of exit within the treaties as they stand is for a country to leave the EU outright. Still, it is not beyond the bounds of imagination for the EU powers to bend the rules.
For all the tens of billions of euro they have lent to Greece, Ireland and Portugal, Europe’s fabled “no-bailout clause” remains in place. For some European leaders, the clear preference is for Greece to scrap the referendum, as Papandreou has now indicated, and form a “unity government” which pledges to execute the EU-IMF deal.
Such an administration would enact a swingeing budget for 2012, in line with the rescue pact, before calling an election. This would liberate the €8 billion loan that euro zone leaders and the IMF blocked on Wednesday night, giving Greece a final opportunity to avert bankruptcy while its people think long and hard about their future and the leaders they choose.
At the time of writing, the Greek opposition New Democracy party has pledged support for the bailout package and would like a transition government leading to early elections. But Papandreou will agree to neither, it seems.
In modern times, as events remain fluid in Athens, the stakes have never been higher for Greece. The same goes for the euro.
