Europe’s leaders could find the resources to reform the eurozone and advance the European cause
The next few weeks promise to be the most fateful in Europe since the fall of the Berlin Wall. The result of a general election in one small country has the potential to unleash a cascade of economic events that could set back 50 years of European integration and plunge the continent into a prolonged banking crisis and associated economic depression. Or alternatively Europe’s leaders, and Germany in particular, could find the resources and imagination to reform the eurozone and not merely hold the line but advance the European cause.
Sunday’s poll, the second Greek election this year, is a trigger event. Whoever is elected – a pro-European bailout coalition led by New Democracy or an anti-bailout government led by the leftwing party Syriza – will need a new deal from the EU and IMF if they are to avoid Greece defaulting on its international debts and even leaving the euro. The pro-bailout parties will need a renegotiated agreement on the terms of the bailout agreed with the international community to guard their political flank against Syriza. Syriza, if it forms a government, will need a deal because it campaigned for one and otherwise will threaten to lead Greece out of the euro. The political dynamic is brutal, but until now Germany and the EU have refused to blink. Whoever is elected, they say, must stand by the terms of the crucifying bailout already agreed with a previous Greek administration.
The risks that are driving Brussels and Berlin to take such a ruthless approach are clear. The parallel with the collapse of Lehman Brothers in 2008 is on everyone’s mind, as the outgoing World Bank chief, Robert Zoellick, tells the Observer. The US government thought then that it could contain the fall-out from the collapse of one investment bank and that to throw good money after bad in order to bail out one badly run and overstretched investment bank was bad economically, morally and financially. It was disabused, triggering the greatest financial crisis for 80 years.
The open question is whether Greece’s exit from the euro would be a second Lehman event. Angela Merkel is taking the same line as George Bush took in 2008. Germany must not throw good money after bad to bail out one badly run and overstretched European country. Greece must take its medicine – a 25% fall in GDP, collapse in living standards and youth unemployment of 50% – and reform its economic structures. If it chooses to bring back the drachma, that is its choice, but that is only allowing the tax-evading corrupt plutocracy who run Greece to continue unreined. Reform and austerity are the only way through, both morally and economically.
Intriguingly, many Greeks, even some of those suffering most grievously from the current economic travails, would agree with Mrs Merkel that EU membership is the only guarantor against the corrupt political, financial and business cliques that have controlled the country for decades. Many also accept the German case for reform. It is just that what is being asked of Greece is close to impossible and stretching Greek society to the very limits – the main message of Syriza and the reason why it has done so well. This is a crucial new reality in Greek politics. The fear among some is that the still fragile Greek state and democracy may succumb to the darker forces in Greek society, an amalgam of a neo-fascist right, elements in the police and armed services and even organised crime. Nor can Mrs Merkel really be sure that if Greece did leave the euro the contagion could be contained. Suddenly, an irrevocable monetary union would not be irrevocable. Losses on Greek debt might be containable; after all, most big investors, banks and companies got out long ago. What would not be containable is the fear among countries such as Ireland, Portugal, Spain and even Italy that their countries could suffer the same fate as Greece.
The European Central Bank would have to flood the financial markets with euros. It would be economic and financial pandemonium. Even if the euro consolidated around a core membership – say the original six founders of the Common Market plus some Scandinavian and central European countries – they could not escape the depressive economic consequences. Nor could they avoid the reality that the structure of what remains of eurozone governance had to be reformed. One way or another, there has to be change. A far-sighted EU would use the Greek elections as a springboard for that change, as Nikos Konstandaras argues.
First, the new Greek government must be offered further forgiveness of its foreign debts, a moratorium on further cuts in the social wage and an opportunity to stimulate the economy with a range of infrastructure projects financed by an enlarged European Investment Bank. The new plan for cutting Greece’s public deficit must be associated with a strategy for growth that, once approved by the European Commission, can be implemented. Greek banks should also be eligible to join a newly created European banking union. Greece needs something closer to a Marshall Plan than more austerity.
If the euro is to survive as a currency that includes the current 17 members there are three preconditions. The only way to head off a fully fledged bank run jumping across national boundaries is for all countries in Europe to offer a joint European deposit insurance scheme, accept common bank regulation and a bank recapitalisation system. Europe’s taxpayers, just as they have done in the UK and US, have got to invest more risk capital in Europe’s banks. Without such a banking union the eurozone will not survive.
The second precondition is that the strong countries in Europe must accept that they have an obligation to stimulate their economies, just as weak countries have to accept austerity. There must be a symmetry of economic obligation. The European Central Bank should accept a dual mandate as does the US Federal Reserve: to stabilise prices but also to promote economic growth.
Finally, Europe must accept the profundity of the German economic challenge – not just to accept fiscal discipline but also to get serious about production, innovation and business building. Europe needs to rethink its social contract around the principle of flexi-security, combining a greater commitment to labour market adaptability with real security for working people – more training and more transitional help to find work when unemployed. If the eurozone is to survive and prosper, nothing less will do. There must be a wholesale redesign of the economic structure of Europe. If Greece’s election triggers that, it will be real democracy at work.