Despite fears of an epic crisis, election results indicate the Greeks will form a coalition that will honor bailout conditions and prevent a financial meltdown that would have been triggered by an exit from the euro.
The eyes of the financial world were on Greece once again this weekend, as the Hellenes went to the polls for the second time in six weeks. It’s fair to say that the world hasn’t been this focused on Greece for more than 2,000 years, and the ability of this nation of 11 million people to hold the world in thrall is, on the face of it, rather extraordinary.
But Greece has become the domino of the moment, the symbol of all that is wrong with the European Union and its euro currency, and heading into the election, the world confronted the prospect that a left-wing coalition rejecting the recent bailout would win a majority and plunge the euro zone into a crisis of epic proportions.
Instead, it seems that the New Democracy Party in alliance with PASOK, the socialist party, will form a coalition that will honor many of the conditions of the bailout and prevent, for the moment, a spiraling financial crisis triggered by a Greek exit from the euro, setting off a financial chain reaction that would engulf Spain and then Italy, and so end in flames the European financial union.
But those same financial markets are not so easily placated in today’s world. Remove one proximate cause of a global synchronous meltdown, and another springs to take its place, or another two or three, which in its hydralike fashion is an ironic paean to ancient Greek mythology. The financial world has yet to adjust to the reality of global linkages and the potential for global meltdowns that the crisis of 2008 revealed as one of the signal dangers or our era. The possibility that the fragile coalition of PASOK–New Democracy might just crumble before a government is formed was enough to temper the initial enthusiasm of markets, which are far more prepared for crisis and catastrophe than for resolution and moving forward.
A man waits to cast his vote in Athens on Sunday. (Louisa Gouliamaki, AFP / Getty Images)
The meeting of the world’s leading economic powers at the G20 summit in Mexico on Monday and Tuesday is already focused on how to halt the wildfire spread of panic throughout Europe and the potential for that to go viral and global. You would be hard-pressed to read one piece of informed (let alone uninformed) commentary and analysis that speaks with much optimism and hope that the leaders of the world given the current economic structures of various countries can act effectively to staunch contagion. Judging from the tenor of these analyses, we are doomed now or doomed later, but doomed we are.
We are told that the Germans will countenance no “mutualization” of European debt akin to what bound together the American states in the 1790s and binds them together even now. We are told that China’s economic model is showing not only cracks but early signs of terminal flaws; that the United States is headed for a fiscal cliff; that the once-stellar emerging stories of Brazil and India are losing luster fast; and that the world is drowning in a sea of too much debt, too much austerity, too little growth, poor leaders, and structural problems that will get worse before they get better.
Can an election save Greece from the abyss? From the frontrunners—an old conservative and a young anti-austerity chap—to the fringe candidates, Barbie Latza Nadeau on the contenders.
In many ways, it may not even matter who wins the Greek elections on June 17. According to the last published polls, the margin is too narrow to call, much like May 6, when the election failed to produce a clear winner. The parties with the highest vote count were then unable to forge a coalition despite a presidential mandate to do so, which is why Greeks are heading back to the polls this coming Sunday. But this time, the stakes are much higher. Pundits are billing the election as a referendum on the euro, but in reality, it may be entirely too late. Greece agreed to take a $167 billion bailout from the European Union and International Monetary Fund last October, but the country will still be broke by the end of July unless they can come up with $1.7 billion to cover a staggering tax-revenue shortfall caused by a financial vacuum created by cuts in pensions and job losses. If they don’t find the cash, the Greek government will stop paying state salaries and pensions, and they won’t be able to afford to import fuel, food, and medicine, meaning Sunday’s winner—if there is one—has a serious challenge to tackle at home even before heading to Brussels.
Supporters of Evangelos Venizelos, the leader of the social democratic political party PASOK, listen to him speak on June 13, 2012 at a rally ahead of Sunday's general election in Athens, Greece. (Oli Scarff / Getty Images)
By Greek law, the last election polls are allowed to be published two weeks before voting takes place. The last polls pointed to the likelihood that 10 very different political leaders would win seats in Parliament. The highest support goes to Andonis Samaras of New Democracy and Alexis Tspiras of the Coalition of the Radical Left or SYRIZA party. New Democracy has been part of Greece’s government for decades, but they only captured 18.9 percent of the vote on May 6. Final polls put them somewhere between 22.7 and 26.1 percent ahead of Sunday’s showdown. The anti-bailout party SYRIZA garnered 16.6 percent of the vote on an anti-austerity, anti-euro platform, but pulled out of a coalition deal in the 11th hour in the days after the May vote, which paved the way for this weekend’s election. SYRIZA were polling at between 20.1 and 31.5 percent in the final published polls.
The two frontrunners couldn’t be more diverse. Samaras is a conservative 60-year-old who has campaigned on a platform to keep Greece in the euro zone while promising to make some fiscal adjustments to appease the staggering number of Greeks who are now below the poverty line because of austerity measures. Tsipras, the youngest contender at just 37, has won his support with a staunch anti-austerity platform, appealing to the thousands of Greeks who can no longer stretch their paychecks to the end of the month—if they have paychecks at all. His anti-Europe rhetoric has struck a chord with some voters and scared off others who see a return to the drachma as an instant fail. This week, he softened his stance amid rumors that his support was waning, telling a Greek television program that he remains open to “discussion” on the bailout terms—if European leaders meet Greece halfway. “If they say ‘no’ to everything, it means that they want the end of the Greek people and the euro,” he said, putting the blame on Brussels. “If Greece doesn’t get its next loan installment, the euro zone will collapse the next day.”
Many of the less popular contenders in Sunday’s battle are familiar faces on the Greek political scene. Evangelos Venizelos, 55, of the socialist PASOK party, which shared ruling power over Greece with New Democracy for years, was a strong favorite on May 6, but performed miserably, getting just 13.2 percent of the vote. Because of PASOK’s parliamentary history and Greece’s current financial debacle because of bad management, Venizelos, a former finance minister, is seen by many as past his prime. Final polls showed his support somewhere between 9.9 and 15.5 percent.
The May elections gave life to Greece’s extreme-right party, Golden Dawn, led by 55-year-old Nikolaos Michaloliakos, who received a shocking 7 percent of the vote on a promise to expel all illegal immigrants from the country and to set land mines along the borders to stop any from trying to return. Golden Dawn supports an anti-bailout, anti-euro solution and vows that Greece needs to reinvent itself. At last count, the most extreme party left on the ballot was polling at about 5.5 percent.
The rest of the lineup won’t stand much of a chance to win big, but they may hold the key to what sort of coalition Greece might come up with and how long it will last. Populist Panos Kammenos, a 46-year-old fireball who formed the Independent Greeks after bailing from New Democracy, has a somewhat schizophrenic anti-bailout, pro-euro plan for the country, telling followers that it is possible for the country to ditch the bailout agreement but remain part of the euro zone. Kammenos got 10.6 percent of the vote on May 6 and is polling slightly lower at 5.3 to 7.4 percent ahead of Sunday’s vote.
Greece’s Communist Party (or KKE) is led by 66-year-old Aleka Papariga, one of only two females among the top party leaders. She has been blamed for instigating violent anti-austerity riots through her anti-euro, anti-bailout battle cries that Greece should leave the European Union entirely. She got 8.5 percent of the vote in May and is polling between 4 and 6.3 percent in the last published surveys. Greece’s oldest political party, the Democratic Left, is currently led by 64-year-old Fotis Kouvelis who has campaigned on a pro-euro, anti-bailout agenda that includes severe spending cuts in defense, public administration and health care and a tax hike on businesses and financial institutes. They won 6.1 percent of the vote in May and have been polling slightly higher at 4.4 to 8.8 percent ahead of Sunday’s ballot.
While Cyprus mulls bailout.
Another day, another euro-zone country on the brink of disaster. Italian officials expressed concern Monday that the $125 billion Spanish bailout would not be enough to stop the crisis from spreading—and that Italy could not support such a huge burden. Italy, the euro zone’s third-largest economy, does not have enough economic growth to generate the bailout money itself, so the government will most likely be forced to borrow it—at high interest rates. On Monday Italy’s main stock index was the worst performer in Europe, as Prime Minister Mario Monti warned over the weekend that there is “risk of contagion.” Meanwhile, European officials and bankers said Tuesday that the government of Cyprus is reportedly considering a bailout—encouraged by the large Spanish bailout.
As focus shifts from Spain to Greece.
European stocks took a turn for the better early Monday as markets breathed a sigh of relief after Spain accepted a bailout offer over the weekend. The collective exhale may be only temporary, however, as politicians and investors alike turn their attention from Spain back to Greece, where voters are set to head to the polls later this month. The pro-bailout New Democracy party shows a slight lead in the most recent polls, but whether or not that will be enough to carry it past widespread anti-austerity sentiment will keep market watchers on edge right through the returns. Spain’s IBEX-35 index surged 4.5 percent Monday morning while Greece’s ASE shot up 2.4 percent and Germany’s DAX rose 2 percent.
No problem! A reeling Spain has agreed to ask the European Union for $125 billion to rescue its banks, but its prime minister is still trying to make the deal look like a political win. Mike Elkin reports from Madrid.
At a press conference Sunday, Spanish Prime Minister Mariano Rajoy gave the impression that the agreement to ask the European Union for as much as $125 billion to bail out Spain’s financial sector is just one step on the long path toward prosperity—no need to worry.
But as corruption investigations into Spanish banks’ shady property deals continue, and as independent auditors prepare their views on the country’s banking sector, the reasons for the EU lifeline could prove much more sinister. Spanish banks, specifically the savings banks, are collapsing because of greed, corruption, and denial.
“It would have been bad news for Europe had Spain’s banks failed,” said José Ignacio Torreblanca, a senior research fellow at the European Council on Foreign Relations. “So it was in everyone’s interest that this should happen. The only real criticism can be made against the Spanish government, which took an absurd position—first denying that a bailout was in the works and then trying to sell it as a political victory.”
The latest tally from the Bank of Spain says Spanish banks hold around $233 billion in “problematic” real-estate holdings, including mortgages and repossessed homes. Empty building blocks and half-finished property developments litter the country, hangovers from when credit was cheap and banks issued loans for more money than they could cover. Banks began to operate outside their normal jurisdictions, opening branches at a record pace and financing housing projects to sign up the new homeowners as customers.
Nearly half of Spanish loans are issued by Spain’s savings banks, known as cajas de ahorros: semipublic institutions that, prior to a 2010 reform, were unlisted and had to allot a percentage of their profits to social programs. The regional governments, however, oversee the cajas. In many cases, regional politicians have used their influence over the cajas to finance unsound projects.
On the eastern coast of Spain in Castellón, for example, sits a $250 million airport that has yet to welcome an airplane’s wheels on its tarmac. With visions of golf courses and luxury resorts to build during the boom years, the former provincial leader needed an airport. No problem.
Spanish Prime Minister Mariano Rajoy speaks during a press conference Sunday in Madrid. Spain became the fourth and largest country to ask Europe to rescue its failing banks, a bailout of up to $125 billion that leaders hoped would stabilize a financial crisis that threatens to break apart the 17-country euro zone. (Daniel Ochoa de Olza / AP Photo)
Down in Castilla–La Mancha, a desolate area south of Madrid known as the home of Don Quixote, the local caja got in over its head with another political boondoggle: a casino resort and an international airport. Nevada-based Harrah’s and other developers eventually scrapped the casino plan, but in 2008 Caja Castilla–La Mancha (CCM) and the regional government built its $1.4 billion airport. No problem. It could accommodate 2.5 million passengers a year, but drew around 45,000 annually for the two routes scheduled. The airport shut down in April.
Battered by a skyrocketing jobless rate and failing banks, Spain finally accepted a bailout of up to $125 billion from euro-zone countries. From the causes to the size to terms, the seven most important things to know about Spain’s bailout.
What Are the Root Causes?
For a country with a relatively low debt problem before the global downturn in 2008, Spain took a surprising nosedive—then headed toward rock bottom. One culprit is the housing bubble created after low interest rates that came with adoption of the euro caused housing prices to triple in the decade between 1996 and 2007. Now the bubble has popped—leaving banks with bad mortgage debts and spending cutbacks. In addition, fast-rising wages led to overspending on cheap imports—against Spain’s expensive exports—and left the currency overvalued. As recently as last year, the country was spending 5 percent more than it was earning from the global market.
Nature of Spain’s Economy
The nation’s economy is reeling, and its unemployment rate is languishing at close to 25 percent—one of the highest in the euro zone. S&P recently downgraded the country’s credit rating from A to BBB because the economy is expected to shrink over the next two years. But the country’s economy remains the fourth largest in Europe, after Germany, France, and Italy. It also is the 13th-biggest economy in the world, more than four times the size of Greece’s. In fact, Spain will be the largest country in the euro zone to get a bailout so far. The economy’s size had led to fears that a sovereign bailout of Spain would have to be much larger than the bailout that went to Greece, Ireland, or Portugal and that it would strain the resources of Europe’s new bailout fund. Spain also has repeatedly warned that if its economy failed, that would bring down the euro.
How Big is the Spain Bailout?
The exact amount of Spain’s bailout is unknown, but it could be up to $125 billion. The exact amount will be revealed after outside accountants complete an audit of the banks by June 21. When an amount is settled on, the loans will be sent to the Spanish government’s Fund for Orderly Bank Restructuring, which was created at the outset of the crisis, but has since been nearly emptied helping the smaller failed banks. Also unknown is where the money will come from. It will either be sent from the European Financial Stability Facility—the zone’s $550 billion rescue fund—or the new $625 billion European Stability Mechanism.
How the Money Will Be Used
Spanish officials are quick to point out that the money will be specifically targeted at the country’s troubled banking sector. In other words, it is not a sovereign bailout, but a banking bailout. Some are referring to it as a “bailout lite” since it is targeted specifically at banks and is smaller than previous bailouts. In fact, Spanish Prime Minister Mariano Rajoy has attempted to avoid calling it bailout altogether, instead describing it as a “line of credit.” Government officials even claim that as long as banks pay back the money, it will not increase the nation’s deficit. They also insist that Spain will not need all the funds being offered, but that the $125 billion figure includes “a safety margin.” But not everyone thinks “bailout lite” will be enough. While the International Monetary Fund estimated that $46 billion would be the minimum bailout needed to shore up the country’s banking sector, JPMorgan expressed the belief that Spain eventually will need a full IMF/EU bailout, which the bank calculated would total between $350 billion and $450 billion.
Stock markets are up on the news of a $125 billion agreement to bail out Spain, but the financial commentators aren’t convinced—and are still gearing up for economic Armageddon. They’re wrong to panic, says Zachary Karabell.
Over the weekend, the Spanish government bowed to the necessity of seeking a bailout for its banking system. The amount was large: $125 billion in loans from the European Union to stave off the collapse of Spanish banks. The result was greeted with relief by financial markets around the world, with stocks initially rising, bond prices falling, and the outflows from southern European banks for the moment stanched.
Nonetheless, the commentary from the financial world was a resounding, “Yes, but ...” Financeland and its attendant media have become weary, cynical, and dismissive, the result of three years of ongoing crises of confidence in the euro zone. It’s Greece one day, Italy the next, then Spain or Portugal, then stern words from cash-rich but idea-poor Germany, then mixed signals from the French. All the while increasingly worried Italians, Spanish, Greeks, and others withdraw money from their bank accounts as the rhetoric turns ever more grim.
Added to the toxic sentiment stew are years of crisis and then pallid recovery in the United States and renewed uncertainty about the viability of China’s economic trajectory. Juxtaposed to that negativity, a weekend of Spanish firewalls to prop up a broken banking system with guarantees of more debt from a euro zone that has not even begun to resolve its collective morass is seen not as a solution but rather a brief reprieve. The inevitable storm will erupt either sooner, once the Greeks vote next Sunday, or later, once the next bank run or systemic crack appears.
The financial world has become almost universally convinced that “the Big One” is coming. What precisely that will entail is not exactly clear, but the consensus suggests that it will make whatever happened in the months after the collapse of Lehman Brothers in the fall of 2008 seem mild by comparison. It will be a global synchronous implosion of the fiat money system of paper currencies unchecked by impotent central banks and governments unable to coordinate policy quickly enough stave off collapse. Greece is seen as a possible trigger, the domino that will end up hindering Spain and then Italy from funding their debts, leading to the dissolution of the euro and generating global waves that imperil U.S. money-market funds and Asian stability.
These fears are so deeply embedded in all discussions of what is taking place that it is nearly impossible to have a coherent discussion in financeland about real risks and their likelihood. Yes, Greece may indeed elect a rejectionist coalition June 17 that refuses to implement the punishing austerity measures demanded in return for bailout funds, and yes, that could indeed lead to lots of bad things. And yes, China may simultaneously suffer the hard economic landing that so many have feared for years, with real estate truly crashing, growth halting, and instability following. And yes, the U.S. government may approach the “fiscal cliff” in the fall and fail to pass new tax and spending laws, thereby triggering downgrades and economic contraction.
Denis Doyle, Getty Images
All of these are possible. The question is, are they probable? The very fact that they are possible now means in financeland that they are likely, hence the tendency to sell now, seek safety, and then analyze. For Western publics, mired in years of slow or no growth—and, in the cases of Spain and Greece, stuck in a deep recession that is getting worse—the view forward is grim, and fears have greater weight than arguments for more constructive outcomes. The result is a global feedback loop of increasing negativity, which in itself has become yet another risk.
Yet at each moment in the past few years when those fears have reached a crescendo, actions have been taken to prevent everything from unraveling. Central banks have acted and governments have coordinated, almost in spite of protestations to the contrary. German officials have affirmed their support of the euro, but have almost routinely dashed any hopes that the European nations might join together and jointly absorb losses or issue debt before they have carved a common fiscal union at some point five or 10 years down the line. Yet at each moment of most acute tension, whether in the late spring of 2010 or late fall of 2011, Germany has bowed to necessity, and funds have materialized. Even in the United States, the budget impasse of the summer of 2011 ended with a resolution, not a default.
Spain has accepted a big bank bailout, but the Eurostorm isn't ending anytime soon—and it may come to American shores just in time for the election.
Could Europe cost Barack Obama the presidency? At first sight, that seems like a crazy question. Isn’t November’s election supposed to be decided in key swing states like Florida and Ohio, not foreign countries like Greece and Spain? And don’t left-leaning Europeans love Obama and loathe Republicans?
Sure. But the possibility is now very real that a double-dip recession in Europe could kill off hopes of a sustained recovery in the United States. As the president showed in his anxious press conference last Friday, he well understands the danger emanating from across the pond. Slower growth and higher unemployment can only hurt his chances in an already very tight race with Mitt Romney.
Most Americans are bored or baffled by Europe. Try explaining the latest news about Greek politics or Spanish banks, and their eyelids begin to droop. So, at the end of a four-week road trip round Europe, let me try putting this in familiar American terms.
Imagine that the United States had never ratified the Constitution and was still working with the 1781 Articles of Confederation. Imagine a tiny federal government with almost no revenue. Only the states get to tax and borrow. Now imagine that Nevada has a debt in excess of 150 percent of the state’s gross domestic product. Imagine, too, the beginning of a massive bank run in California. And imagine that unemployment in these states is above 20 percent, with youth unemployment twice as high. Picture riots in Las Vegas and a general strike in Los Angeles.
Illustration by Timothy Goodman
Now imagine that the only way to deal with these problems is for Nevada and California to go cap in hand to Virginia or Texas—where unemployment today really is half what it is in Nevada. Imagine negotiations between the governors of all 50 states about the terms and conditions of the bailout. Imagine the International Monetary Fund arriving in Sacramento to negotiate an austerity program.
This is pretty much where Europe finds itself today. Whereas the United States, with its federal system, has—almost without discussion—shared the burden of the financial crisis between the states of the Union, Europe has almost none of the institutions that would make that possible.
The revenues of the European central institutions are trivially small: less than 1 percent of EU GDP. There is no central European Treasury. There is no federal European debt. All the Europeans have is a European Central Bank. And today they are discovering the hard way what some of us pointed out more than 13 years ago, when the single European currency came into existence: that’s not enough.
Greek elections have cast the euro zone into chaos, but the fates still may favor a pro-austerity candidate. Barbie Latza Nadeau says that no matter what the outcome, the euro is doomed.
With the euro zone teetering perilously on the edge of total collapse, one would think that politicians in the most critical countries would behave themselves—especially on live television. But that’s hardly the case. Last week, Greek politicos battled it out during a televised debate ahead of crucial elections June 17. Ilias Kasidiaris, the spokesman for the neo-Nazi Golden Dawn Party, lost his temper and assaulted two female rivals as the cameras rolled. First he threw a glass of water at Rena Dorou, a representative of the popular left-leaning SYRZIA party. Then, in a fit of clearly uncontrollable rage, he punched Communist Party member Liana Kanelli three times on either side of her head.
People walk by a Democratic Left election-campaign kiosk in Athens last week. (Aris Messinis / AFP-Getty Images)
The violence is inexcusable, but it does underscore the tension felt in some of Europe’s most volatile countries. Greek voters will head back to the polls next Sunday after a May 6 election failed to produce a definitive winner. The Greeks are essentially voting for or against austerity measures as laid out by the two front-runners. Alexis Tsipras of the SYRIZA party is banking on sentiment that Greeks have had enough of European-mandated austerity measures, even if that means abandoning the euro for a return to the drachma. His rival Antonis Samaras of New Democracy hopes instead that Greeks will do what it takes to stay in Europe. “This is not just about the euro or the drachma,” Samaras told a Greek reporter last week. “It is about Europe or the drachma.”
No matter whom the fates favor in the Greek election—if it truly is a victory to take over a country that will likely be the first domino to fall in a total European collapse—it is likely a short-term job. Neither party has the power base to stay in control for long, and Greece is nearly out of money despite two major European Union bailouts. Most analysts say the “Grexit,” or Greek exodus from the EU, is a matter of when, not if. Mario Draghi, the head of the European Central Bank, said the current euro-zone structure is “unsustainable” and called on countries that face the biggest fiscal hurdles to come forward with a better plan than what is in place now. “European leaders need to clarify what is the vision,” he said last week. “What is the euro going to look like a certain number of years from now? The sooner this is specified, the better.”
But at the rate Europe’s weaker economies are crumbling, there is no guarantee that the euro will last at all. On Saturday, Spain earned a dubious distinction as the fourth European nation to accept a European bailout when the finance minister announced that the country’s banks would accept an estimated €100 billion EU handout. Portugal, Ireland, and Greece (nicknamed the PIG nations) have also accepted bailouts, paving the way to a sort of fiscal death when it comes to the social costs extracted from the population attached to EU handouts. So far, the Spanish bailout will not stipulate any new austerity measures and instead will regulate the banking sector. But few are optimistic that the banks alone can save Spain from a similar fate to Greece’s.
With Greece going back to the polls and Spain trying to save its assets, all eyes naturally turn to Italy, largely seen as the next weakest link. Austerity measures have caused growing distrust in the interim government and anger among Italians who feel squeezed from paying taxes and cutting social benefits. A poll last week showed that more than half of the Italian population thought life was better before the euro. “There is a permanent risk of contagion, contagion from Greece, from other countries,” said Italian technocrat Prime Minister Mario Monti. “That is why strengthening the euro zone is of such collective interest.”
In the meantime, Europeans in the Southern regions are taking extraordinary measures to protect what little they have left out of fear even that will disappear. Panic-driven bank runs have led some financial institutions to limit daily cash withdrawals in Greece, Spain, and Italy. In Spain, the exodus of $31 billion in the month of April alone is what triggered fear and led to the near collapse that led to the bailout. Some Greek banks are already limiting ATM withdrawals to less than €100 a day in cities like Athens to try to control the exodus of euros to other countries for safekeeping.
Since 2009, Greeks have been exporting some $4 million each month from Greek banks. And if Greece is forced out of the euro zone, there is no way the country will be able to avoid rationing food, oil, and health supplies. “Europe’s monetary union has entered a doom loop,” writes Niall Ferguson in this week’s Newsweek, likening the current crisis to the events of the summer of 1931, when “all over Europe, the extremists of the right and the left—fascists and communists—surged in popularity.” Is history circular? The outcome of next weekend’s Greek elections could provide the first real glimpse of whether or not the euro nations are doomed.
A new French president and Greek drama are fanning the flames of crisis.
Barring a miracle, Greece is hurtling toward a destination that is not even supposed to exist: bankrupt, and outside the euro zone. And if Greece is kicked out the door, the political as well as economic staying power of other debt-plagued members of the euro zone will be tested hard—possibly to destruction.
Mayday calls are sounding from Athens to Madrid, from Rome and even Amsterdam, with France’s Nicolas Sarkozy the latest of a dozen political leaders to be washed overboard since the euro zone hit rough seas. Europe’s slow-motion crisis has abruptly reached the point where deals cannot be fudged or decisions postponed. The whole business has become exceedingly complicated and technical because Europe’s leaders, since the beginning of the crisis, have taken only incremental steps without considering the big picture. And, further, they have left public opinion out of the equation, seldom if ever explaining what is at stake and how reforms will bring rewards. This has had consequences for political stability that they should have foreseen.
Alexis Tsipras, the young firebrand whose radical left Syriza movement came from nowhere to win second place in Greece’s recent parliamentary elections on a platform of “can’t pay, won’t pay,” has overturned the cart of rotten apples that passes for the Greek political establishment. But that in turn could upset the rest of Europe, particularly if, as looks probable, Syriza comes first in the next round of elections on June 17 and forms a hard-left anti-bailout coalition government. The miracle Tsipras promises is that Greece can tear up the “usurious” March pact that made the European Union–International Monetary Fund €130 billion bailout for Greece, the second in two years, contingent on deep spending cuts and structural reforms—and yet still keep the euro. Accusing German Chancellor Angela Merkel of playing poker with people’s lives, he insists that when push comes to shove, even Berlin will balk at the risks to the very survival of the euro zone if Greece exits. The Greeks have the “ultimate weapon,” he boasts: however devastating the financial chaos might be for them outside the euro, the very prospect of Greece hobbling back to the drachma could engender such a massive loss of confidence throughout the euro zone that it would unravel the single currency.
Celebrating French President Francois Hollande’s victory earlier this month. (Bertrand Guay / AFP-Getty Images)
Tsipras is putting Greece itself at dauntingly big risk. He may conceivably be right that EU governments are bluffing when they insist that nothing in the Greek bailout deal can be renegotiated. Its current terms doom Greece to an ever deeper depression that will leave the wretched country still more deeply mired in debt. And the trumpeted deal is already unraveling on the markets: the new Greek bonds issued after private investors took a 75 percent haircut a mere two months ago are trading at distress levels already, showing 21 percent yields on 10-year debt. Tweaking the bailout terms could postpone the day of a default that seems inevitable, in the hope that by then the rest of the euro zone would be less vulnerable to contamination. In addition, there is the awkward fact that there is no “legal” way to kick Greece out of the euro. Because the euro is, by law, the currency of the EU and membership is theoretically irrevocable, there is no exit clause in the EU treaties.
But tweaking is one thing: Syriza’s demand to cancel the deal outright, halt debt repayments, and reverse pension and salary cuts is another matter altogether. There is already considerable EU exasperation that Greece has loaded pain on private citizens while failing to actually sack a single one of its 790,000 civil servants, a pampered multitude. If the Greeks do elect a Syriza-led government, they may rapidly find out whether a chaotic default, return to the drachma, and devaluation does in fact offer eventual escape from the debt trap they find intolerable. What Tsipras sees as calling Europe’s bluff looks to Greece’s German paymasters like atrocious blackmail.
And that, only a few months ago, would have been that: what Angela Merkel said, went—with Sarkozy’s publicly unflinching if privately somewhat frustrated support. No longer. For two years, Merkel has doggedly kept her hand stuck in the European dyke, proclaiming even as the cracks widened that, provided everyone manned the pumps round the clock, the dam was structurally sound enough to withstand the rising waters. All that was needed was the courage to undertake deep structural reforms, as Germany did in the 1990s. Abruptly, she finds herself swimming for her life. German financial clout is as great as ever, but it risks finding itself back in the position where Charles de Gaulle liked to describe it: that of a doughty German workhorse controlled by a French rider. From many European quarters, but most critically from France and even in Germany itself, Merkel’s tough disciplinary regime for Europe is finding fewer and fewer takers.
Merkel and Sarkozy, or “Merkozy,” were a decidedly odd couple. Sarkozy’s vaunted enthusiasm for reform evaporated as the French economy faltered, while his appetite increased for burden sharing—notably through persuading Germany to sink funds into Eurobonds that effectively would pool euro-zone debt. For Merkel, anything approaching a “transfer union” was—and is—anathema: better a crippling European recession (from which Germany is not suffering) than tying Germany’s currency to the whims of more profligate cultures. But the Merkozy couple was determined never to fall out. By contrast, the joke making the Paris rounds as it became likely that François Hollande would send Sarkozy packing was that a new packaging of the two names would have to be found. The favorite was not Merlande, but the more pungent Merde, which began to hit the fan within hours of the final count.
Panic about a possible Greek default and euro exit—and the crisis spreading worldwide—is at a fever pitch. Zachary Karabell says we should be wary of Greek dominos falling, but the global obsession is overblown.
For the third May in a row, events in Greece have taken on global significance. The spark this May, the rising debts and plunging growth of the onetime hub of civilization, is largely the same. But why does the fate of a country with not quite 11 million people and about $300 billion in GDP matter so much? Why does a nation with barely more people than one new Chinese city and an economy hardly larger than the state of Maryland continue to roil international markets? Not since the Trojan War has the fate of the Hellenes been so central to humankind.
There are two simple questions to ask: whether the fate of Greece presents a tangible threat to the economic health of the world, and whether we should be worried. The answer, while not quite so simple, is yes, we should be concerned, but not too concerned.
The Greek train wreck is one element of the larger sovereign debt crisis buffeting Europe. That crisis seemed to abate in late November, when the European Central Bank acted swiftly to halt a breakdown in financial markets. By then, the concerns about Greece had spiraled in generalized panic about debt in Europe, especially in the much larger economies of Spain and Italy. As that crisis abated, the Greek government agreed to stringent austerity measures followed by restructuring—i.e., writing off—a large portion of the $300 billion in debt held by private creditors.
But elections in Greece this week have thrown things into chaos once again. The Greek people, it turns out, have had it with austerity and slumping growth. They believe they are being punished unfairly by stern Germans and assorted northern Europeans, and they see no end in sight to declining standards of living, astronomical unemployment, and humiliation. Hence the sudden prominence of a messy coalition of former communists, anarchists, greens, and others on the left in a resounding “we’re as mad as hell and not going to take it anymore” election that left no one able to form a government and new elections scheduled for June.
That still prompts a question: why does this matter so much? Governments rise and fall all over the world with numbing regularity, and some default on their debts, and life goes on. Greece, however, has become a metaphor for Europe, and its unraveling within the single currency of the euro has raised legitimate fears that as Greece goes, so goes all of Europe, which represents nearly a quarter of the global economy.
Lousia Gouliamaki, AFP / Getty Images
Greece matters because the European financial system is bound together by the euro, and no one can see a path to Greece completely defaulting (it has already partly defaulted) or leaving the euro zone without setting off a chain reaction that spreads not just to Italy and Spain but to France and finally to the rest of the more stable, balanced northern economies. And that, then, would inevitably spread around the world as the global financial system suffered the shocks of a European financial meltdown. No one could or would be fully immune.
It is easy enough to chart a course that gets you to some really nightmarish scenarios. Major banks nationalized, shareholders wiped out, pensioners bereft, governments scrambling for cash, printing money, widespread devaluation of currencies, American financial institutions pulling up the drawbridges and hoarding even more money, and the dominos falling in rapid succession. These fears have not faded much in the past two years, and they are intensifying once again.
Will the continent act to avert an economic cataclysm?
With the sap rising and the governments falling, all the European powers are merrily acting in national character.
In the midst of a severe financial crisis, the French have just elected a champagne socialist on promises of a 75 percent top tax rate and a lower retirement age. The Greeks also had an election in which the established parties lost to a ragbag of splinter groups. The outcome of the election was that they need to have another election. (Cue Zorba the Greek theme music.) Meanwhile, the wailing gloom of the flamenco emanates from Spain, where youth unemployment is now around 50 percent.
Within a few hours of arriving in London, I hear the following announcement on the train: “We apologize for the late departure of this service. This was due to the late arrival of essential personnel. [Translation: the driver overslept.] However, we are happy to inform customers that the London Underground is running a nearly normal service.” It’s that “nearly” that is so quintessentially English.
Three days later, in Berlin, I finally reach the Europe that works. Well, sort of. As usual, I find myself marveling at the sheer idleness of the richest and most successful country in the European Union. Lunchtime in the leafy garden of the Café Einstein on the Kurfürstenstrasse shows no sign of ending even at 3 p.m. It’s Thursday. Did you know that the average German now works 1,000 hours a year less than the average South Korean? That’s why when you go on holiday the Germans are already there—and when you go home, they stay on.
Understandably, many American investors have simply given up on Europe. After two years of the world’s most tedious soap opera (“Can Angela get on with François, the new boy in town? Is Mario the real thing after phony old Silvio?”), they have come to the conclusion that it is only a matter of time before the whole euro zone comes crashing down, with Greece in the role of Lehman Brothers.
Carlo Hermann / AFP-Getty Images
Meanwhile, in Berlin they still talk of “buying time.” They mean by this that as long as the European Central Bank keeps printing money, lending to weak Mediterranean banks so that they can buy the bonds of weak Mediterranean governments, it will all work out in the end. This is a delusion. The economies of the Southern European countries are in a disastrous state, comparable with the conditions of the Great Depression. True, they no longer have the Keynesian option to engage in deficit finance; their debts are already too large. But the German prescription of austerity tax hikes and spending cuts in the teeth of recession is losing political credibility with every passing week.
Suddenly it is no longer so hard to imagine a Greek politician deciding to gamble on exiting the euro zone, restoring the drachma, and letting a drastic devaluation do its work. Suddenly it is no longer so hard to imagine the horrendous consequences, with investors asking the obvious question: “If they can leave, who will be next?”
In today's special installment of The Number, Daniel Gross sits down with EU chief Jose Manuel Barroso to discuss the status of the European financial crisis--and why it's too soon to give up on the euro.
The ECB chief’s decision to provide almost unlimited funds to troubled governments could end the Eurozone crisis and lead to global economic stability, says Zachary Karabell.
That's the interest rate that Spain had to pay for selling six-month bonds. Dan Gross and Zachary Karabell on how this could be the beginning of the end of the Euro crisis.
Spain has accepted a big bank bailout, but the Eurostorm isn't ending anytime soon—and it may come to American shores just in time for the election.
The austerity crisis has taken a dire toll on Italy’s poor southern regions, where families have taken to scavenging and scraping by without gas or electricity.
Everyone is on strike—and now no bailout funds until cuts are doubled, reports Barbie Latza Nadeau.
The euro zone is in chaos, but a pro-austerity candidate may win in Greece. By Barbie Latza Nadeau.