If the Greek crisis is not quickly resolved, fate of euro may be in doubt
By Jonathan Eyal, Straits Times Europe Bureau
WHEN leaders of the European Union planned their first summit of this year, they had every reason to feel optimistic. After all, their continent had just selected a new president and foreign minister, major steps towards restoring Europe's glory on the world stage.
But, instead of celebrating, the politicians who attended the European summit on Thursday spent most of their time in feverish attempts to prevent Greece from going bankrupt, for that country cannot repay its debts.
At first sight, this is a storm in a teacup. The Greek economy accounts for barely 2 per cent of the EU's total wealth. Europe has plenty of cash to bail it out. So the pledge from EU leaders on Thursday to take 'determined and coordinated action' should be the end of the story.
Only it isn't. For the Greek crisis is merely a first glimpse of a much bigger problem with Europe's political arrangements. And if it is not quickly resolved, the very existence of the euro, the continent's single currency, may be in doubt.
The invention of the euro was initially hailed as a huge achievement. At the stroke of midnight on Jan 1, 2002, more than a dozen European national currencies - some centuries-old - disappeared. The euro instantly became the world's second-largest reserve currency; other trading blocks in Asia or Latin America watched with envy as the 'old continent' gained a youthful vitality.
Yet few bothered to notice that the euro remained a curious beast. Historically, currency unions take place when a group of nations merge into one; political mergers come before monetary ones. In Europe, however, the process was reversed: a new currency was introduced, but national governments continued to tax, spend and borrow as they wished.
In theory, there are many safeguards to impose discipline. EU countries which adopt the euro must keep their debts low, and spend only as much as they earn. And they cannot borrow from the EU if they get into trouble.
But practice was quite different. Greece, which never met the conditions for euro membership, was allowed in, despite the fact that everyone knew that the country falsified its statistics. And nobody paid much attention to what happened thereafter.
Once safely inside the euro zone, the Greeks could borrow much more cheaply, and they did: Greece owes about €300 billion (S$579 billion). Debt servicing is now costing the country a whopping 12 per cent of gross domestic product, and the country has to raise another €53 billion in the next few months. To all intents and purposes, the Greeks are bankrupt.
Nor is Greece unique. Portugal, Ireland and Spain have equally huge debts, and may be facing a similar fate. International investors have dubbed these unfortunate four as the PIGS group, hardly a flattering nickname.
Having spent months trying to ignore facts, European leaders now accept that the question is no longer just Greece, but the prevention of their currency's meltdown. Nevertheless, pride and politics - like a bad spoof of a Jane Austen novel - continue to determine European priorities. The best institution to bail out Greece is actually the International Monetary Fund (IMF): It has the credits and the expertise to impose the painful reforms which the Greeks have to swallow.
Yet just about the only thing on which the Europeans currently agree is that the IMF should be kept at arm's length: Letting that institution save Greece is regarded as a humiliation, an admission that Europe cannot put its house in order.
The other option is for individual European governments to lend Greece the money it needs. Yet the only country that can do this is Germany. And the Germans wonder why they should bail out their irresponsible cousins. As German Chancellor Angela Merkel memorably put it: 'My people won't understand why their money should be spent to save Greek banks.'
For the moment, European leaders continue to believe that expressing solidarity with Greece is sufficient. 'The Germans wanted only a political statement, which they consider enough to calm financial markets,' a senior European official explained at the end of Thursday's EU summit.
But international investors are no longer prepared to lend to the 'PIGS' on the basis of just political reassurances. The bet is that, as early as Monday, Germany would have to stump up the cash to save Greece. The crisis of confidence in the euro can no longer be tolerated.
However, the implications of the Greek affair extend much wider. Throughout the world, governments are running up huge debts. The near-bankruptcy of one European country will remind everyone that governments can and do go bankrupt. And this will push up the borrowing costs for many nations.
The measures required to reduce debt could plunge Europe into a renewed recession. Already, unemployment in countries in the euro zone stands at about 10 per cent, and in Spain, Europe's fourth largest economy, it is almost 20 per cent. And a European recession will lower consumer demand in what remains China's biggest export market.
More importantly, the Greek episode serves as a warning of an immutable law of economics: that a currency union without a political union is doomed to stagger from one crisis to another. Since a tighter political union is not on the cards, financial speculators are likely to be given plenty of opportunities to bet against the euro in years to come.
Does Europe understand the gravity of its predicament? Not a bit of it.
Earlier this week, Mr Jose Manuel Barroso, the boss of the EU Commission, the continent's executive body, called on Europeans to embrace a 'new wave of optimism'. But while making this public appeal, Mr Barroso also kept checking the messages arriving on his mobile phone.
Just in case there was bad news from Greece.
Feb 14, 2010
Wall St seeks cues on Greek crisis
New York - US stocks could struggle to make headway this week if a meeting of European finance ministers fails to reassure markets that they can contain Greece's debt problems.
Greece's financing problems have focused investors' attention on the growing mountain of public debt as cash-strapped governments around the world spend their way out of recession. The fear is Greece's problems could spread, hurting financial markets.
Finance ministers from the euro zone will meet tomorrow, when US markets are closed for the Presidents' Day holiday, followed by finance ministers from the rest of the European Union on Tuesday.
'What the market wants to hear is that there is a viable remedy,' said Mr Quincy Krosby, market strategist with Prudential Financial in Newark, New Jersey.
'The market will be anticipating how other problems will be handled. Can the solution be applied to the problems that may crop up in Spain, Portugal, Italy (and Ireland) because traders believe the aftershocks are not over.'
European government sources have been sending mixed signals to markets, suggesting a lack of consensus about how to prevent Greece's debt problems from ballooning.
While international headlines continue to grab investors' attention, the plight of the United States economy has taken a back seat. That may change during the week with a government report on housing starts as well as the latest industrial output figures on Wednesday.
Last week, the Dow Jones industrial average and the S&P 500 rose 0.9 per cent, while Nasdaq added 2 per cent. Still, the broad-based S&P 500 is now down 6.5 per cent since hitting a 15-month closing high on Jan 19.