The Greek debt affair has also harmed the European Project, potentially irreparably.
The problem is not that the eurozone found itself facing serious economic challenges. The issue is its failure to anticipate the risk of such a crisis ever happening, the lack of contingency planning, and the eurozone’s inability to deal with the problem on a timely basis. The Greek crisis is now over five years old, with no signs of a permanent solution.
There are only unpalatable choices. Some concessions will not solve the problem. Other eurozone members will have to continue to provide additional financing to Greece, further increasing their risk. Favorable treatment for the Greek government risks opening a Pandora’s Box of demands from other countries to relax austerity measures. Demands for relaxation of budget deficit and debt level targets are likely from Spain, Portugal, Ireland, Italy, and France.
A write-down of debt would crystallize losses. It might threaten the governments of Spain, Portugal, Italy, Finland, the Netherlands, and Germany. If Greece leaves the euro
EURUSD, -0.3260% , then the consequences for the eurozone are unclear. Should Greece prosper outside the single currency, it reduces the attraction of the eurozone for weaker members.
Given the absence of painless solutions, it seems for the moment that neither Greece nor its creditors have any objectives other than avoiding having their fingerprints on the instrument that triggers default, the world’s largest sovereign debt restructuring or a breakup of the euro.
The approach of the EU has also undermined the European project. Major countries such as Germany have reacted to the inability to resolve the crisis by resorting to economic and political repression, entailing less, not more, flexibility, with tougher rules and stricter enforcement, including tighter supervision of national budgets.
Believing that Greece would not willingly leave the euro, a position confirmed by polls, the EU has rejected compromise. Instead, they have sought to maintain pressure, with the cooperation of the ECB, on the Greek government. The aim is to force them to an agreement or expose the divisions within the ruling party and coalition. The EU, which actively campaigned against Syriza’s election, now hopes for the government to collapse and be replaced by a more pliable alternative — as happened in Greece in 2012.
The EU also is using its negotiations to make an example of Greece to discourage similar problems with potential future governments in Spain, and in Portugal, which might want to retreat from austerity.
The EU fails to recognize that its actions may destabilize Europe in unexpected ways. Greece has the potential to undermine Western security, creating a large corridor of vulnerability through the Balkans, the Levant, the Middle East, and Caucasus. While a member of the EU, Greece can veto sanctions reducing European power. Its actions or lack thereof can aggravate the serious refugee crisis confronting Europe. An embittered Greece, hostile to European partners and NATO, has caused alarm in the US. At a deeper level, the EU’s actions are promoting political radicalization on both the political right and left with unknown consequences.
Perhaps the real damage is subtler, as the true face of the European Project and European leaders and elites is exposed. In November 1990, Margaret Thatcher, in responding to a question of European monetary union, anticipated the present situation presciently: “It’s all politics. Who controls interest rates is political. A single currency is about the politics of Europe.”
Satyajit Das is a former banker. His latest book is
“A Banquet of Consequences” (in Australia and Europe), or
“Age of Stagnation (in North America and Asia).
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