The leaders of the
The leaders of the
And no wonder.
Despite efforts at official reassurance, no one really knows the consequences of a Greek exit from the euro zone, or how rapidly big countries like Spain and Italy, and their banks, will feel the effects.
However cavalierly some European officials talk of “managing” a Greek exit, the political and financial costs would represent a fundamental challenge to the European Union and its credibility, and the point of no return may be approaching faster than anyone anticipated.
“Anyone who thinks a Greek departure would be cleansing and not cause systemic contagion is deluding themselves,” said Simon Tilford, chief economist at the Center for European Reform in London. “Already we’ve seen a sharp increase in spreads and the beginnings of capital flight in other struggling euro zone economies,” with the risk of a full-blown
The stresses on the system are now so great that to contain panic and contagion, while protecting countries too big to bail out, would require political choices and financial commitments that many countries, including Germany, Finland and the Netherlands, seem unlikely to make — the prime reason they would prefer that Greece remain.
The problems of Greece and Spain are complicated enough, but the pressure on euro zone leaders to resolve the evident contradictions in the common currency and to move faster toward more political and fiscal integration is rising by the day. The election of François Hollande, a committed European, as president of France may help push Berlin toward more collective responsibility for the euro zone, but Chancellor Angela Merkel of Germany, with her own domestic political concerns, has rarely been willing to move quickly or boldly, which many believe has prolonged and deepened the euro crisis.
Even the British prime minister, David Cameron, warned Europe of the urgent need to fix its economic imbalances and structure. Britain is outside the euro zone and has no intention of joining, so Mr. Cameron’s words were resented. But they rang loudly. Europe, he said, “either has to make up, or it is looking at a potential breakup.”
While Greece is only a small part of the euro zone — and European officials concede it should not have been allowed to join in the first place — its exit is likely to be more expensive and complicated than figuring out a way for it to remain. That would subject, of course, to Greek voters producing a functioning government in new parliamentary elections on June 17.
Ms. Merkel is now talking of special stimulus programs for Greece to help ease the pain of austerity, but any new deal with Athens will have to be negotiated with a real government, and there is no guarantee that the next elections will produce a working majority. They might even lead to a governing coalition that is hostile to the loan agreement that Germany has insisted is not open to significant renegotiation.
In the interim, as European officials try to send strong messages to Greek voters about the consequences of an exit, a continuing run on Greek banks — a panic that threatened to spread to Spain last week — could force the European Central Bank to jettison Greece anyway by refusing to replace the euros fleeing the country for lack of proper collateral.
European finance officials are trying to be reassuring about a Greek exit, saying that most Greek debt is now held by nations, which can afford the loss if necessary, and that better firewalls exist to protect the rest of the euro zone, and so that the impact on the world economy will be manageable. But while Europe is better prepared for a Greek restructuring of its debt — writing down what is currently held by states and the European bailout funds — a Greek departure is likely to be seen as the beginning of the end for the whole euro zone project, a major accomplishment, whatever its faults, in the postwar construction of a Europe “whole and at peace.”
“A Greek exit should be avoided; it will be very disruptive and disorderly, and not just for the Greeks,” said Nicolas Véron, an economist at Bruegel, a research and policy institute, in Brussels and the Peterson Institute for International Economics in Washington. “It’s a classic clash between moral and economic attitudes. A neighbor may keep starting fires, which is exasperating, but if you know his fire is going to run to your roof you have to act to put it out. Leaders need to make hard calculations about what is best for everyone.”
Daniela Schwarzer, a European Union expert at the German Institute for International and Security Affairs, said that a Greek default, within the European Union or without, would be costly, requiring a write-down of much of the debt held by European states and the European Central Bank, which member states would then have to recapitalize. But that is just the financial expense, which is the least of it.
More important is “to avoid the first example of European Union membership not being forever,” Ms. Schwarzer said. “If that taboo is broken, I think there will be considerable contagion,” including unsustainable spikes in the bond market; further runs on the banks in Spain, Portugal and Italy; and social and political unrest beyond Greece.
“There’s a very real risk that Spain could go the way of Greece, Portugal and Ireland,” which have had to seek bailouts, Mr. Tilford, the economist, said. “That’s a systemic risk to the euro as a whole.”
Experts believe that damage could be limited, but only by bold political steps toward more centralization of power in the euro zone that may prove too hard for politicians to take.
A Greek departure would have to be accompanied by “a package of substantive reforms of how the European Union is run, not just a bigger firewall, but a move to some measure of debt mutualization, of pan-euro-zone bank protection and regulation and a commitment to broaden the mandate of the European Central Bank,” Mr. Tilford said.
The bank must be able to act as a lender of last resort, as the Federal Reserve does in the United States, to stop “this poisonous interplay between government debt and the banking sector,” he said. In the United States, for example, if a major bank fails it does not take Delaware with it, and if the state of California has debt problems, it does not undermine confidence in California’s banks.
Mr. Véron suggested that leaders should simply announce that the European bailout funds would guarantee all national bank deposit insurance plans — that Europe would stand behind all euro zone deposits. “That would be a massive enhancer of trust for depositors and investors,” he said, especially in Greece.
But such changes would mean a major political leap for Ms. Merkel and other Northern European leaders and a redrawing of the European Central Bank charter, a step Berlin has so far refused to support. And it would imply that as in the United States, funds from countries with healthy surpluses would flow in some measure to help the weaker ones with deficits.
“If Greece goes, there would have to be a clear signal from Germany that it would do everything necessary to keep Spain, and that the E.C.B. will do all it must to help Spanish banks,” said Charles Grant, director of the Center for European Reform.
Keeping Greece or letting it leave will be costly either way. Even if the Greeks elect a pro-European majority in Parliament, at this point nearly all the Greek parties are calling for a renegotiation of the latest bailout deal. Ms. Merkel is now talking of some stimulus and job-creation programs for Greece in parallel, but even a mini-Marshall Plan will not pull Athens out of its debt trap without a restructuring of the rest of its obligations.
Mr. Véron said that there was more Athens could do — or if it could not, it must allow others to do it — like firing of additional state employees, breaking up cartels and creating a fair and effective system of tax collection.
“There is scope for compromise on austerity, because the strategy has not worked very well,” he said. “But to do that you need to give creditors a modicum of trust that remaining obligations will be met. The Greek public doesn’t want austerity, wants to stay in the euro and likes being sovereign. But some of that will have to give, no matter what.”
The Social Democratic Party in Germany, which has been emboldened by Mr. Hollande’s victory, may encourage Ms. Merkel to make more daring political moves to reinforce the European Central Bank. Ms. Merkel needs the Social Democrats if she is to get her own fiscal treaty and the new permanent bailout fund, the European Stability Mechanism, ratified by the required two-thirds vote in Parliament.
“It really comes down to the Germans,” Mr. Grant said. “If they don’t do the right thing, the euro zone comes closer to unraveling.”