Greece Can No Longer Delay Euro Zone Exit

After Greek voters rejected austerity in last week’s election, plunging the country into a political crisis, Europe has been searching for a Plan B for Greece. It’s time to admit that the EU/IMF rescue plan has failed. Greece’s best hopes now lie in a return to the drachma (…..) The conclusion is clear: The current strategy to rescue Greece has failed, but at the same time the risks of a withdrawal are shrinking. This makes it all the more important to take advantage of the opportunities of a new beginning, in the interest of both Greece and euro zone. It would make eurozone more attractive to new members, such as Poland, with its strong economy. Foreign Minister Radoslaw Sikorski has already signaled Warsaw’s desire to join the euro zone. If Athens were to leave the euro zone, it would send a message that the fiscal and budgetary rules in the monetary union must be more closely adhered to in the future. It would also make it easier for Europeans to implement necessary resolutions to save the euro. In many countries, the situation in Greece only inflames resistance to bailout funds and aid programs. A comeback of the drachma would change this, so that it comes as no surprise that in Germany, in particular, many people are inclined to take a hard line on Greece. Horst Seehofer, head of the conservative Christian Social Union, the Bavarian sister party to Merkel’s Christian Democratic Union, has long called for a Greek withdrawal, and he now feels vindicated. If Athens were to reintroduce the drachma, it would be “neither the end of the euro nor the end of the EU”. “We must preserve Germany’s economic strength. That’s more important that Greece remaining in the euro zone.” The two other partners in Germany’s ruling coalition are sharpening their tone toward Athens. “Greece only has a future in the euro zone if its debts are consistently reduced and structural reforms are put in place,” says Economics Minister Philipp Rösler, leader of business-friendly Free Democrats. “A softening of, or deviation from, the established programs will not occur.” Volker Bouffier, CDU governor of western German state of Hesse, argues for strictly adhering to the current austerity course. “Greece has already received more money than was paid out under the Marshall Plan”. “Greeks must treat the measures as an opportunity, or else they don’t stand a chance.” But even with a comeback of the drachma, the Greek problem would not be solved by a long shot. A withdrawal from the monetary union would subject the EU to the biggest test in its history. It would have to continue supporting Greeks to prevent the country from descending into chaos and anarchy. One thing is clear: If Greece returns to the drachma, that will be the point when Europe’s work really begins.



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6 Responses to Greece Can No Longer Delay Euro Zone Exit

  1. Everyone is getting themselves into a fearful tizzy over Greece. To hear some of the comment, including from our own Prime Minister never mind the ever-lugubrious Governor of the Bank of England, you’d think that the end of the world, or at very least the euro, was at hand. No, it’s not, not at any rate unless Europe’s political leaders are determined to drive it that way. At 5 per cent of the eurozone’s total economy, the rest of Europe could either pay up to save Greece or let it fall without disaster. At heart it’s not a financial crisis but a political one. The austerity deal imposed on Greece is no longer believed either within Greece or without. Instead of panicking over the results of the election called for next month, and inducing hysteria over the domino effect of a Greek exit from the euro, Europe’s leaders should be asking a more immediate question: what do they want the politicians of any party in Greece to say to the electorate when they go to the polls that will make them believe that staying in Europe will give them a better future? Telling them that it’s either to keep with the austerity programme they’ve signed up to or they won’t get any more money actually has the reverse effect of the intended. The more that politicians outside Greece talk of the disasters that an anti-austerity vote would bring, the more the average Greek feels Europe cannot afford to let them go. Listen to the views recorded on the street and that’s what most of the Greek public seems to believe. They want to stay in the euro but they don’t want to continue down a vicious cycle of cuts. Raising the spectre of catastrophe only reinforces their view that it won’t be allowed to happen. The problem is, of course, that the eurozone governments don’t know themselves what they want. By now, given the contingency planning, there are many who think, for perfectly good economic reasons, that Greece should head for the exit door, just as there are those who, for more political reasons, feel it is essential that the eurozone remains intact. It’s no good telling the Greeks that they must keep to their punishing regime when the whole eurozone is wobbling under the demands of a new French President for a different approach. A rethink is not before time. Austerity on its own isn’t working. Ask virtually any European politician or leader and they would agree. It’s near to being the new consensus. But just as they are terrified that letting the Greeks off the hook would spook the markets with uncontrollable consequences, so European leaders are frightened of easing back from the Fiscal Pact agreed only six months ago. They shouldn’t be. The markets may act as the final arbiter in a region of debt but it is a mistake to see them as the Inquisition. They want what we all want in a way: some stability in which to judge the future and some security to make sure they don’t lose their money (…..)

    It might also provide the context in which the Greeks can determine their future. A referendum would still seem the best way to decide whether they want in or out of the euro. But at least that choice should be informed by a vision in which austerity would be just part of a bigger picture.

  2. Europe’s economic struggles are a consistent drag on American growth. A eurozone breakup, in chaos and acrimony, could be a Lehman-like shock of incalculable damage. For years, the stronger European economies have managed to bump along from challenge to challenge — providing bailouts to the improvident in exchange for fiscal restraint and reform, while reassuring credit markets in an elaborate confidence game. But the fundamental problem has never been resolved. Europe is a monetary union without being a fiscal union. Germany has become the continent’s rich uncle, vouching for the credit and covering the debts of distant relations without authority over their spending habits. German patience with this arrangement is now being tested by Greece. It would be possible for Europe to maintain Greece — just 2 percent of the continent’s economy — as a permanent dependent. Greece could default within the euro zone and have much of its debt written off. But Greece is a living, breathing moral hazard. What message would it send to Italy, Spain, Ireland and Portugal — all undertaking difficult austerity programs — if the European Union provided special treatment to its least trustworthy member? Many Germans believe that Greece entered the E.U. in the first place on the basis of false economic figures. Should German taxpayers now assume permanent responsibility for a political system apparently incapable of responsibility? The birthplace of democracy seems to lack a working one. So Europe seems to be preparing for the departure of Greece from the euro — kicking the dependent out of the house to live on his own. For many months, German and French banks have been quietly offloading Greek liabilities. European finance ministries are beginning to plan for an event with no legal precedent or procedure. The Greek return to a devalued drachma would probably not be disastrous (except for the Greeks), so long as the damage is containable. Credit markets — having tested Greek political will and found it wanting — would press Portugal, Italy and Spain. Any sign of weakness would push their borrowing costs to astronomical, unsustainable levels. The trick will be for the E.U. to construct a firewall of long-term confidence — a reasonable conviction among investors that other economies are on a responsible, sustainable path (…..)

  3. (…..) So will Europe finally rise to the occasion? Let’s hope so — and not just because a euro breakup would have negative ripple effects throughout the world. For the biggest costs of European policy failure would probably be political. Think of it this way: Failure of the euro would amount to a huge defeat for the broader European project, the attempt to bring peace, prosperity and democracy to a continent with a terrible history. It would also have much the same effect that the failure of austerity is having in Greece, discrediting the political mainstream and empowering extremists. All of us, then, have a big stake in European success — yet it’s up to the Europeans themselves to deliver that success. The whole world is waiting to see whether they’re up to the task.

  4. The eurozone’s troubles no longer qualify as a crisis, an unstable situation that could either quickly improve or take a dramatic turn for the worse. They are, instead, a new normal — a painful situation, to be sure, but one that will last for years to come. Citizens, investors, and policymakers should let go of the idea that there is some magic bullet that could quickly kill off Europe’s ailments. By the same token, despite the real possibility of Greek exit, the eurozone is not on the brink of collapse. The European Union and its common currency will hold together, but the road to recovery will be long. It has been nearly two and a half years since the incoming socialist government in Greece revealed the extent to which its predecessor had accumulated debt, precipitating an economic storm that has left slashed budgets, collapsed governments, and record unemployment in its wake. With each dramatic turn, observers have anticipated the story’s denouement. But again and again, a definitive resolution — either a policy fix or a total collapse — has failed to emerge. The truth is that there are no quick escapes from the eurozone’s predicament. Divorce is no solution. Although some economists suggest that struggling countries on the periphery could leave the euro and return to a national currency in order to regain competitiveness and restore growth, no country would willingly leave the eurozone; doing so would amount to economic suicide. Its financial system would collapse, and ensuing bank runs and riots would make today’s social unrest seem quaint by comparison. What is more, even after a partial default, the country’s government and financial firms would still be burdened by debt denominated largely in euros. As the value of the new national currency plummeted, the debt would become unbearable, and the government, now outside the club, would not be able to turn to the eurozone for help. Some economists go further and argue that countries on Europe’s periphery could thrive outside the euro straitjacket. This is equally unconvincing. Southern European countries’ economies suffer from deep structural problems that predate the euro. Spanish unemployment rates fluctuated between 15 and 22 percent throughout most of the 1990s; Greece has been in default for nearly half of its history as an independent state. These countries are far more likely to tackle their underlying problems and thrive inside the eurozone than outside it. Others have suggested that Germany and other core countries — weary of funding endless bailouts — might abandon the euro. That is even less plausible. Germany has been the greatest beneficiary of European integration and the common currency. Forty percent of German exports go to eurozone countries, and the common currency has reduced transaction costs and boosted German growth. An unraveling of the eurozone would devastate German banks, and any new German currency would appreciate rapidly, damaging the country’s export-led economic model (…..)

  5. Amid the hard graft of paying down vastly inflated national debts, the promise of another – easier – way is a seductive one. It is also, alas, too good to be true. Both here and in Europe, the economic debate is becoming ever more polarised, pitting “austerity” against “growth” as if politicians have merely to choose between the two. It is an over-simplification that could hardly be further from reality, and the spread of its appeal could hardly be more unhelpful (…..) After the bursting of the biggest credit bubble in history, there is no way to avoid a painful correction. It is time for politicians to stop making false promises, to stop posturing about differences that scarcely exist, and to start telling the truth about what is possible and what is not.

  6. (…..) There are surely lessons here from John Maynard Keynes, who understood that the state and the market are interdependent. But Keynes had little to say about social justice, including the political commitments with which Europe emerged after World War II. These led to the birth of the modern welfare state and national health services — not to support a market economy but to protect human well-being. Though these social issues did not engage Keynes deeply, there is an old tradition in economics of combining efficient markets with the provision of public services that the market may not be able to deliver. As Adam Smith (often seen simplistically as the first guru of free-market economics) wrote in “The Wealth of Nations,” there are “two distinct objects” of an economy: “first, to provide a plentiful revenue or subsistence for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services.” Perhaps the most troubling aspect of Europe’s current malaise is the replacement of democratic commitments by financial dictates — from leaders of the European Union and the European Central Bank, and indirectly from credit-rating agencies, whose judgments have been notoriously unsound. Participatory public discussion — the “government by discussion” expounded by democratic theorists like John Stuart Mill and Walter Bagehot — could have identified appropriate reforms over a reasonable span of time, without threatening the foundations of Europe’s system of social justice. In contrast, drastic cuts in public services with very little general discussion of their necessity, efficacy or balance have been revolting to a large section of the European population and have played into the hands of extremists on both ends of the political spectrum. Europe cannot revive itself without addressing two areas of political legitimacy. First, Europe cannot hand itself over to the unilateral views — or good intentions — of experts without public reasoning and informed consent of its citizens. Given the transparent disdain for the public, it is no surprise that in election after election the public has shown its dissatisfaction by voting out incumbents. Second, both democracy and the chance of creating good policy are undermined when ineffective and blatantly unjust policies are dictated by leaders. The obvious failure of the austerity mandates imposed so far has undermined not only public participation — a value in itself — but also the possibility of arriving at a sensible, and sensibly timed, solution. This is a surely a far cry from the “united democratic Europe” that the pioneers of European unity sought.


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