VIEW: Greece and the European Union —S P Seth

Tensions between the two giants of the European project, France and Germany, reportedly reached a point where President Sarkozy of France allegedly threatened to quit the euro currency zone unless the German Chancellor came around and accepted the rescue package

Who would have thought
that a small country like Greece would become the barometer of the European, if not the world’s, economy? But this is how things are panning out. It so happens that Greece is a member of the 16-nation European Monetary Union (EMU), with the euro as their common currency. Since the EMU is a large economic market, its gyrations, triggered by Greece, are also impacting the global economy. This is clear from the damage it is doing to global stock markets.

It is by now well known that Greece is on the brink of insolvency. It had managed to enter the European Union (EU) by falsifying its national accounts to make its budget deficit appear to be under three percent, as required under the entry rules. And it continued to practice creative accounting by fudging its national figures even when it was on a debt spree. And in this the US investment bank Goldman Sachs reportedly gave it a helping hand.

By the time its socialist government under Prime Minister George Papandreou came to power, its conservative predecessor had done enough damage. By the time the world was engulfed by the 2008-9 global financial crisis, Greece was increasingly becoming a basket case. But the crunch came when Athens realised that it would not be able to roll over some of its debts that were due this month (May), because the investors were reluctant to lend it more money or buy its bonds. In any case, the interest rate on borrowing more money was reaching usurious rates.

It was in these circumstances that Greece turned to its European club (basically Germany and France, the two richest economies in the euro zone) to bail it out from this situation. After dithering for some time, a rescue package for 110 billion euros was agreed upon, with Greece undertaking a range of austerity measures over the next few years to drastically bring down its debt levels by cutting spending, raising taxes, imposing a wage freeze and other measures involving tremendous pain for the people. No wonder this brought the unions and their political supporters out onto the streets in mass protests. This caused extensive damage to property and businesses, as well as the loss of three lives when a bank was set alight. Greece thus looked like it was drifting into a civil war. And that danger has not quite disappeared.

However, the package for Greece’s bailout did not do much good because it was not considered a serious and adequate response to a much larger problem involving also other euro zone countries, especially Portugal, Spain and Ireland — with Italy remaining a borderline case. At last, the EU, in concert with the IMF, put together a stabilisation package of 750 billion euros for the weaker European economies, requiring them to live under an austerity regime over several years.

The problem is that even this larger package does not seem to be working because: (i) the structural problems of these economies are too entrenched and will take a long time to sort out, if at all; (ii) the resultant political turmoil and economic pain in these countries might get out of hand with large scale protests and worse; (iii) the rescue package lacks details and is rather vague on how it will be implemented; (iv) it, therefore, looks more like a confidence boost than a real plan with measurable outcomes. The markets are, therefore, jittery and the euro has been taking a battering.

Another problem is that enforcing harsh measures of curtailing public spending, cutting employment, freezing or cutting salaries and raising taxes could create a recession-like or deflationary situation in the affected economies, making the remedy worse than the disease.

Since Greece, Portugal, Spain and Ireland are members of the common currency area, their sickness is bound to, sooner or later, affect the economies of other European countries, resulting in an overall economic slowdown and, possibly, recession. For instance, French and German banks hold a sizeable chunk of Greece’s debt, and any default would seriously affect their economies. This will lead to a credit crunch and it seems likely that this might compound the 2008-9 global financial crisis, which is still not quite worked out.

As one international investor commented, “It (euro) is a political currency and nobody is minding the economics behind the necessities to have a strong currency. I am afraid it is (common currency) going to dissolve. They are throwing more money at the problem and it is going to make things worse down the road.”

That seems to already be happening. For instance, just after the European Central Bank (ECB) began buying 16.5 billion euros worth of bonds from southern European countries (Greece, Portugal and Spain) and Ireland in an attempt to halt market panic in these countries, investors, as one banker has put it, “leapt at the opportunity to clear their balance sheets of intolerable risks”.

Apart from the severe economic ramifications of Greece’s situation, compounded by that of Portugal, Spain and Ireland (with Italy not far behind), it has also brought to the surface low-lying political tensions in Europe. Largely because of a lack of popular support within Germany for the economic bailout of sick European countries, its Chancellor, Angela Merkel, was hesitant to commit Germany.

And tensions between the two giants of the European project, France and Germany, reportedly reached a point where President Sarkozy of France allegedly threatened to quit the euro currency zone unless the German Chancellor came around and accepted the rescue package.

Indeed, there are open rumblings in some European countries accusing Germany of softening its commitment to European integration and seeking to become a normal nationalist country, putting its own interests before that of larger Europe. The notion of the “eternal Nazi” seems to still linger even 65 years after World War II.

The shaping of the EU made Germany a respectable member of a larger Europe. However, Europe’s economic crisis could easily make Germany its villain. Therefore, a lot rides on the way its economic crisis is handled.

The writer is a senior journalist and academic based in Sydney, Australia