By Peter Wahl*
Even politically it is becoming clearer that the present type of crisis management has failed and the austerity policies are clearly proving to be not only unable to lead Greece on an upward economic path but have continuously worsened the crisis.
Outside Europe, there is profound concern that a default of Greece could unleash a negative chain reaction on the entire world economy. At the G8 summit on May 18-19, 2012 in Camp David (USA), leaders of the world’s richest nations were alarmed by this scenario. Obama is afraid that the US economy will be affected by the crisis before the elections in November 2012. Central bankers and politicians in all parts of the world are becoming increasingly nervous. It becomes ever clearer that, after four years of permanent crisis, the worst is still to come and that June 2012 might be the point where the crisis takes on new dimensions.
**New elections in Greece might bring a turnabout**
The Greek elections on May 6, 2012 turned out to be a referendum against the austerity policies imposed by the ‘Troika’ of the IMF, European Commission and European Central Bank. The two leading parties of the last decades, NEA DEMOKRATIA (conservative) and PASOK (social democrat), which had executed the Troika’s policies, were weakened considerably and could no longer achieve a majority to form a government. PASOK was even surpassed by SYRIZA, an alliance left of the PASOK. SYRIZA is pro-European and wants Greece to stay in the Eurozone, but wants to renegotiate the conditions of the Troika’s rescue package.
Because no government could be formed, new elections in Greece will be held on June 17, 2012. In an opinion poll of May 20, 2012 by the Public Issues Institute SYRIZA was at 28% (16.8% at the election results of May 6, 2012), NEA DEMOKRATIA at 24% (18.9%) and PASOK at 15% (13.2%).
If SYRIZA happens to lead the government, Greece and the EU would be confronted with two options:
– The Troika agrees to moderate the conditions of the rescue package and the EU helps Greece with a growth programme, which abandons the unfair austerity.
– The Troika stops all financial assistance. In that case Greece would be bankrupt in a few weeks. Because it would run out of the currency it would have to leave the Euro and have to establish a new currency or return to the Drachma.
The second option with a Greek default would have incalculable consequences, not only for the country itself but also for the Eurozone, the EU and the world economy. It would be very expensive for the Eurozone because the guarantees from the previous rescue package amount to €160 billion. In addition the Greek Central Bank has a deficit of €100 billion with the ECB (European Central Bank) and the other national central banks of the Euro zone (TARGET II accounts).
This money would be lost. Germany is not only the forerunner of the austerity ideology but also the biggest creditor. German taxpayers would have to bear 27% of the €260 billion public debt of Greece, all in all €70.2 billion. Considering that this is a huge amount of money, Chancellor Merkel will think twice about whether she can afford this economically and politically. Furthermore, German and other EU private banks and enterprises would lose money and some of them would have to be rescued with additional taxpayers’ money.
But the biggest danger would be the contagion. A default of Greece could trigger a chain reaction on other crisis countries. In particular Spain is at present in such a precarious situation that further destabilisation could push the country into an abyss.
If the NEA DEMOKRATIKA wins, the same situation might arise as in the previous elections, so that no coalition is possible. But even if the conservative party should be in a position to lead a government, new measures to stabilise the country would be necessary as the situation has further worsened.
**Not only an economic problem**
But a Greek default would not only be an economic catastrophe but also a political disaster. The image of the EU, which has already suffered considerably since the beginning of the crisis, would be adversely affected. EU countries outside the Eurozone, which plan to join the Euro later, would lose interest. The acceptance of the EU among citizens would decline further, even in countries that were traditionally EU friendly.
For instance in Germany the rate of acceptance decreased from 62% in 2005 to 41% in 2011. The Dutch government collapsed over the austerity measures, resulting in new elections in September 2012. Many protests are taking place against the austerity measures and the Fiscal Pact all over the EU. The whole idea of European integration would be discredited and the centrifugal tendencies in the union would become more pronounced.
If, despite all these facts, Merkel and the EU tell the Greeks, as happened at the informal EU summit on May 23, that the country has to stick to the agreements with the Troika, it would be perceived very much as part of power play. In the light of the opinion polls mentioned above, the intention of such messages is to pressurise Greek voters to bring the old and obedient parties back in government.
**Merkel under pressure**
Inside the EU, the hardliners of austerity are increasingly on the defensive. This is to a large extent the result of the French presidential elections. François Hollande has already indicated that he not only wants to soften the conditions for Greece, but that he also wants a paradigm shift of crisis management, away from the one-sided orientation on austerity. Instead, the Fiscal Pact should be combined with a Growth Pact.
Although terminating the present programme of crisis management would have a positive impact, the EU will have to undergo a period of severe conflict between France and Germany before substantial change takes place that ensures a growth strategy or pact which is not just an ornament but on a par with the Fiscal Pact. The head of the Italian government of technocrats, Mario Monti, is supporting the new French approach as also the EU Commission.
Another spectacular controversy is taking place over Euro bonds, whereby bonds are not issued by national governments but issued and guaranteed by the EU countries collectively. While the new French president Hollande considers this instrument a prerequisite to solve the sovereign debt crisis, Berlin does not even want to discuss the issue.
No wonder, as Germany just succeeded in placing two-year bonds worth €4.55 billion at an effective interest rate of zero percent. The seriousness of the conflict was underlined by Hollande when he threatened not to ratify the Fiscal Pact if Berlin would not accept the Growth Pact. At the same time, France is blocking the appointment of German finance minister Schäuble as president of the Euro-Group. Hollande would accept Schäuble only if he gives up his post as finance minister.
As the Paris-Berlin axis is the backbone of the Eurozone crisis management, this could result in temporary paralysis and compromises towards the smallest common denominator. The informal Euro summit on May 23, 2012 gave an idea of things to come. While Hollande was advocating Eurobonds as a first step to combat the debt crisis, Merkel excluded this instrument in the strictest terms.
On the domestic front Merkel is also coming under pressure. The result of the French elections has encouraged the German Social Democrats (SPD) and the Greens to tie their support for the Fiscal Pact to the acceptance of a Growth Programme and the Financial Transaction Tax. The Fiscal Pact needs a two third majority in the Bundestag, this is why the government needs at least the votes of the SPD and the Greens.
All these points taken together lead to a shift in the balance of power and Germany will be obliged sooner or later to retreat on its prevailing stance. This will be all the more necessary as the challenges go far beyond and deeper than the Greek drama. However, the question remains whether change will be too slow and come too late.
*Peter Wahl is a researcher at WEED, a German policy institute, where he works on issues of world trade and international finance. This article is extracted from the EU Financial Reforms Newsletter – May 2012 published by SOMO and WEED. It is part of a common project on EU regulation of financial markets. Other project partners that contribute to the newsletter series are: AITEC, Glopolis, New Economics Foundation and Vedegylet.