Contributed By Protesilaos Stavrou
Protesilaos Stavrou blog
As time passes the crisis in the euro area gets worse. Italy is being forced to borrow at forbiddingly high interest rates, despite the constant intervention of the European Central Bank, while doubts are growing over the ability of France, the eurozone’s second largest economy, to hold on to its excellent credit rating (AAA) given the exposure of its banks to the European South’s debts and its unsafe fiscal finances. The mere announcement of the Greek Prime Minister, George Papandreou that he was willing to put to a referendum the new bailout package for the country, was enough to plunge international markets into greater uncertainty. There are four fundamental conclusions deriving from the events that recently took place that are worth pointing out.
Firstly the resulting chaos in the markets reaffirmed, in a clear manner, the systemic structure of the crisis in the eurozone. Markets plunged due to the knowledge that a disorderly default of Greece resulting from a negative outcome in the referendum, would trigger a Lehman-like chain reaction that would bring down the Euro area’s quasi-bankrupt banking system, effectively putting into serious threat the very finances of core European countries who would then be forced to provide tons of capital to their threatened banks to prevent a complete financial meltdown. In addition the negative reaction of the markets rests in the deep understanding that there is no ultimate backstop in the Euro Area that would prevent a repetition of the Greek tragedy in other countries, thus giving birth to fears over the solvency of Italy, Spain and their banks as well as the credibility and safety of the rest of euro states. Investors do realize to some extend (for now) that the EFSF, the region’s bailout fund, which supposedly functions as the ultimate backstop in the Euro Area is in fact a tower of cards as it relies on the guarantees of all member-states including those who are bankrupt or almost bankrupt (see On the new Greek bailout and the Euro package that will die at birth). For as long as the euro lacks all the necessary stabilizing mechanisms and its constituent member-states rely only on inane, simultaneous austerity markets will always remain highly skeptical of the capacity of Europeans to escape from the crisis.
Secondly the Greek political system is unable to provide credible representation for the country and has been proven to be more of a zombie than a vibrant community from where fruitful, progressive ideas would emerge, suggesting that Greece is practically finished. The country will remain above water only for as long as it continues to be the top systemic risk in the eurozone. Dr. Elpida Prasopoulou of the LSE raised some very accurate points about the Greek political system in her latest article titled “Zombie Politics”, where she concluded with the following:
In any case, Greece runs out of alternatives. Isolation seems now a very possible prospect and this will not only turn Greece into a barren place with no real prospects of recovery. It will also perpetuate the political practices of the past since there won’t be any space for alternative political propositions to emerge. As such, Greek people will be stuck in the strong embrace of their zombie political system with no real prospect of release.
Thirdly, European elites proved their weakness and ultimate inability to provide an effective response to the prospect of a disorderly default of Greece, apart from bluffs and meaningless threats about forcing the country out of the euro. An exit of Greece from the euro is non-sense, not so because of the absense of a law envisaging such a process, but mostly due to the organic interconnection of Euro member-states. An exit of Greece from the euro, either forceful or voluntary (“voluntary”) will have extremely unpleasant economic and political effects on the rest of the euro area. The economic implications are of course the uncontrollable shock waves of the default that will bring in front of serious trouble private banks that are heavily exposed to the Greek debt or to other banks who their selves hold such toxic debt, then states ultimately leading to immense market pressures that can well cause the collapse of the Euro (see Currency Union and Greek Euro exit). While the political ramifications will commence from the existence of a very bad precedent whereby a state is forced out of the euro due to its debts, suggesting that similar action might be taken against other countries whose economic condition resembles that of Greece. In such a case speculation will naturally rise over which state might be the next to follow Greece back to its national currency. In short an exit of Greece from the euro is not only disastrous for the country itself, but ultimate it opens the Pandora’s Box for the entire eurozone.
Fourthly, the severity of the situation makes it crystal clear that there are no alternatives for Europe at this stage. The dilemma European elites will soon face is either real, viable solution to the systemic crisis of the Euro that will have to include the abolition of dogmatic economic and political beliefs together with the adoption of radical measures, or the gradual disintegration of the Euro. At any rate what is certain is that the Eurozone is running out of time. At the very best the area will have another two years of life, should all things go as planned. Yet the logic of “other things equal” is almost always proven false in the midst of the current crisis where a mere statement of a Prime Minister (regardless if it was right or wrong) in a country that represents less than 2% of the area’s aggregate GDP, can cause such great panic.
The continual denial of European leaders to address the crisis as it really is, has the effect of rendering the whole Euro Area more vulnerable to pressures, contrary to the belief that “significant progress” is made from summit after summit where no actual solutions are presented. European citizens have been forced to bear witness to a cynical shadow play from a collective of political elites accompanied by pompous rhetoric and documents of triumphant self-admiration. The acts of hypocrisy cannot possibly conceal the underlying structural flaws of the euro, the malignancies of Europe’s banks and the political weakness to accept the problem in its true form as a crisis of the Euro, not an amalgamation of national crises deriving from fiscal “indiscipline”. The crisis is deeply political and will only be solved when Europe’s politicians put community good above party interest.