Wednesday, May 16, 2012

Greek tragedy comes full circle

May 15, 2012


Europe faces its biggest political tests as Greece heads for euro exit

By Jonathan Eyal

ALTHOUGH few dare say so publicly, most European leaders privately accept that the unthinkable is about to happen: Greece may have to leave the euro zone. Financial markets are already making preparations for an event they nicknamed 'Grexit'.

Still, the manner of the Greeks' departure and the way the aftermath of the crisis is handled will shape Europe's destiny for years. The continent's biggest political tests are beginning.

In theory, Greece can still pull back from the brink. Even if no ruling coalition is feasible, a caretaker government pledged to respect the nation's obligations remains in place.

But the reality is that the battle for the soul of Greece is already lost. Two-thirds of its voters opted for parties determined to stop repaying the country's debts, while claiming that they also wish to keep the euro - in other words a majority wants to have its cake and eat it too.

Those responsible for this curious outcome are Greece's own politicians, who nurtured a collective mood of self-denial. Many ordinary Greeks genuinely believe that their country is a victim of a 'plot' by bankers, who first encouraged Greece to borrow excessively, and are now lending more money at high interest rates in order to recover their debts.

The fact that Greece itself is responsible for its excessive borrowing impresses few. Nor do many Greeks seem to understand that the €200 billion (S$325 billion) in additional help given to them over the past year is the hard-earned money of other European taxpayers; the view from Athens is that these are funds plucked out of thin air by 'fat bankers'.

Germany, which provided the bulk of the bailout money, gets no gratitude either; some Greeks believe that the Germans should offer the cash for free, as 'compensation' for World War II.

It is now impossible to reverse this poisonous Greek narrative. It is equally impossible to see how any Greek leader can persuade his people to stick with austerity policies which have slashed the nation's wealth by a fifth. The conclusion is inescapable: default is looming. More ominously, it is likely to be a messy affair.

Greek politicians such as Mr Alexis Tsipras, the youthful leader of Syriza, the radical left movement which sprang out of nowhere to become the country's second-biggest party, assume that they can blackmail the rest of Europe into continuing to offer cash without preconditions.

[Politicians in trying to get themselves elected, will say anything, even lie to the electorate. Then the voters cannot make an informed decision based on facts, and instead vote on stories spun by the politicians. And that is how tragedies are created.]

The defeat suffered by German Chancellor Angela Merkel in local elections on Sunday is also interpreted as a move away from the policies of austerity which Dr Merkel foisted on the rest of Europe.

But while a weaker Merkel government may lead to a greater German readiness to relax austerity conditions on other European nations such as France or Spain, it does nothing for Greece. German voters, as surveys have shown, are not clamouring to hand over their money to the Greeks and, with Greece accounting for only 2.3 per cent of Europe's economy, the country is dispensable.

Indeed, making an example out of Greece by rejecting any concession is almost certain to be Dr Merkel's way of showing the rest of Europe that Germany cannot be taken for granted.

The Greek default may come as soon as the end of next month, when Athens has to cut another €11 billion out of its government spending - which given the new composition of the Greek Parliament, cannot happen. If the European Union stops offering money then, Greece will default almost immediately.

What follows after that amounts to - as one EU official put it - 'a jump into the abyss without a parachute'. A Greek default could trigger off a Europe-wide panic, leading to the collapse of the euro and a global economic slump.

But there are good grounds for believing that this is too alarmist. Most Greek debt is already in the hands of European governments or the European Central Bank, which means Greece's default will not spell a European-wide banking meltdown.

Greek banks will, of course, collapse. The country will have to issue a new currency, which will promptly crash. It will also have to temporarily close its borders in order to prevent capital from fleeing. And, as unemployment soars, the chances of civil strife in Greece remain high.

The technical difficulties which could be created by a Greek default remain mind-boggling. But European governments have spent months quietly preparing for such an eventuality. Nor would it be surprising to discover that Greece has already printed an alternative currency. It may have not have been coincidental that the Greek national bank upgraded its British-made printing presses last year.

The key for the rest of Europe will be to make sure that a Greek default remains confined to that country. This will mean that other vulnerable nations such as Portugal or Spain, would immediately be offered additional bailout funds even if they don't actually require it; the purpose should be to reassure people that countries which observe their obligations retain the benefits of Europe's single currency.

No doubt Europe's credibility will suffer a permanent blow: it will no longer be possible for it to claim that it is an 'oasis of stability' after allowing one of its members to default. So, for decades to come, Europe will have to pay a risk premium on its borrowing.

Still, Mr Jens Weidmann, the head of Germany's central bank, the Bundesbank, was probably right when he pointed out over the weekend that, 'for Greece the consequences would be much more grave than for the rest of the euro zone'. Investors will conclude that Greece was a uniquely horrible case, and that its fate need not be replicated elsewhere in Europe.

Ironically, however, Greece will not escape from its obligations by defaulting. If it wishes to remain part of the EU, it will still have to repay every cent it owes and may have to do it the harder way, with its own devalued currency. The Greeks will also be unable to borrow, so they will be confronted by the rather unusual experience of having to live within their means.

The nation which invented the word 'tragedy' should grasp this situation pretty well.

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