Greek tragedy set to take a few down with it
'Demands from Athens for the tough bailout conditions to be softened are turned down flat by the International Monetary Fund, the European Central Bank and the European Commission.' Photo: Reuters
IT HAPPENS like this. The election result in Greece means pro-austerity parties lack the parliamentary support and the moral authority to govern. Demands from Athens for the tough bailout conditions to be softened are turned down flat by the International Monetary Fund, the European Central Bank and the European Commission.
Political impasse in Greece leads to a second general election being called for next month. Angela Merkel makes it clear the next tranche of cash to keep Greek banks and the Greek state solvent will not be given unless the plan is adhered to in full. The strains on the single currency become intolerable; Greece leaves the euro and defaults, starting the process by which monetary union unravels.
In May 2010, when, in Britain, David Cameron and Nick Clegg were negotiating the terms of their coalition agreement and Greece received its first package of financial support, the idea that Europe was about to be gripped by a crisis that would put monetary union in peril was ridiculed. Today, as the euro fell on foreign exchanges, the Greek stockmarket plunged and investors piled into the safe haven of German bonds, it no longer seems quite so far-fetched.
The jittery mood in the markets reflects the fear that the turmoil of the past five years - the subprime crisis, the near-death experience of the banks, the deepest slump since the Great Depression, the sovereign debt crisis - is to reach a climax in the coming months with a battle for the euro's survival.
For two years, Europe has been force-fed a diet of unrelenting austerity. The crisis began in the private sector, but such was its impact on consumer spending, investment and trade that governments have seen their public finances dive. Spending cuts have been imposed, pensions have been made less generous and taxes have gone up. The policy has been an economic disaster. Growth has collapsed, unemployment has soared and budget deficits have been much bigger than forecast. Election results from France and Greece show that it has also been a political disaster: voters have made it clear they want their politicians to chart a different course. Democracy has trumped austerity.
In the fantasy world of policymakers in Brussels, the eurozone would fast-track to full fiscal union, but there is no chance of this happening soon. Nor is there much prospect of ameliorating austerity with a growth strategy that would give the more vulnerable countries a fighting chance of meeting the unrealistic deficit reduction targets.
French President-elect Francois Hollande may be talking about ''a new start'' but his slogan finds no real echo in Berlin, where the German government was insisting yesterday that the weekend elections change nothing of substance. To be sure, Merkel emphasised the need for growth in her message of congratulation to the new French president but while the rhetoric may change, the German policy stance promises to be unflinching.
Greece, according to Merkel, must grind its way through its adjustment program; France must adhere to the fiscal compact thrashed out last year; there will be no eurobonds to transfer resources from rich to poor parts of the eurozone, and no extension of the European Central Bank's remit so that it can emulate the quantitative easing programs of the Federal Reserve and the Bank of England.
The deep problems of monetary union are encapsulated in this tension. The eurozone is a currency union not a federal state, which means it lacks a single finance minister calling the shots and a centralised budget like that in the US or Britain. Germany is by far the biggest and most powerful nation in the eurozone and, while committed to keeping the single currency alive, takes a conservative approach to monetary and fiscal policy. Over the past two years, it has been able to impose this on Europe's governments but not on their voters.
Forecasting events in financial markets is a mug's game, but it's a fair bet that the next few weeks will not be pretty. Fears that Hollande's election will lead to a rift between anti-austerity Paris and pro-austerity Berlin is one concern. Yet Hollande's deficit reduction plan is not so different from that proposed by outgoing French President Nicolas Sarkozy.
A bigger immediate threat is that a Greek exit from the euro - rated as a 50-75 per cent probability by Citigroup - will have a domino effect on Portugal, Spain and Italy.
''There's every chance the euro will go into free fall in the weeks ahead against all the major currencies. Investors are waking up to the fact that the once-ridiculous notion the euro could collapse is increasingly the most likely outcome,'' said Jason Conibear, director of foreign exchange firm Cambridge Mercantile.
On past form, the response of Europe's policymakers will be to muddle through, but that is no longer a realistic option.
Europe is heading deeper into a double-dip recession. There is now a stark choice. Unless the terms of Greece's bailout are made less onerous, it is heading for the euro exit door.