Evidence of Fragility (Part 4)

The Economist (TE) remains as firmly anti-Brexit as ever. That makes it a balancing source of evidence for us, who remain as firmly pro-Brexit as ever. In last week’s edition TE has an article and a leader on the latest crisis in Greece. In short, Greece has to make €6.3bn bond repayments in July and doesn’t have the money, of course. The European Stability Mechanism (ESM), which is the bail-out fund for eurozone member states, is proposing to advance this sum to Greece to enable the government to avoid defaulting on the repayment, which they must make to the European Central Bank (ECB).

greek-crisis-7

To receive the third bail-out payment, in August 2015, the Greek government, led by hard-left Syriza, had to accept severe austerity terms, which have made it unpopular and unlikely to win another election, should one be held in the near future.

Meanwhile other members of the eurozone, notably Germany and the Netherlands, are strongly opposed to a fourth bail-out of Greece. They will hold national elections this year and both governments are hard-pressed by far-right, ‘populist’ parties which are antagonistic to European Monetary Union (EMU) and indeed to the EU itself. greek-crisis-9

The ESM is a central plank of the EU’s platform for completing monetary union (see our take on the Five Presidents Report and particularly Fixated on Union). It is no surprise that Germany and other member states see the ESM as a ‘transfer union’ through which economically successful nations will pay for the weaknesses of unsuccessful nations. This remains a major source of friction within the EU and another reason to believe it is fragile.

At the European Commission level a further Greek bail-out is seen as essential to preserve the eurozone and avoid a Grexit. A sub-text is that any threat to economic and monetary union is also a threat to the federal agenda, which is the main purpose of the EU.

The International Monetary Fund (IMF) is a key player in all this. The Fund argues that a further bout of austerity might push the Greek economy into recession. But this would have to be a condition of any further bail-out and so some debt relief is needed, contrary to the view from the EU.greek-crisis-12

Here are some sample quotations from TE, a strongly pro-EU, pro-EMU, anti-Brexit newspaper:

Now a Greek disaster is looming all over again.”

If the money is withheld, Greece will be in default. Sooner or later, Grexit would be hard to avoid.”

“…the economy is too weak to withstand a fresh bout of austerity.”

Germany and the Netherlands do not trust the European Commission to police Greece, and have made the fund’s involvement a condition of their support. The fund is reluctant.”

“…an explicit pledge to let Greece off its debts would be politically poisonous…”

The conditions attached to the bail-outs drastically reduce the government’s control over economic policy.” greek-crisis-2

“…the alternative is to call elections that Syriza would probably lose…”

What sets today’s drama apart is the dispute among Greece’s creditors. These date back to the complex architecture of euro-zone bail-outs, jerry-built in haste in 2010. But today the debate is more public, and potentially more serious.”

Some formula will probably be found to allow Greece to avoid default… But that will do little to alleviate Greece’s misery.”

Northern Europeans will grow more, not less, hostile to debt forgiveness…”

The Economist sees all this as arising from disputes among major international organisations and national governments. An alternative perspective would see it as a clash between the expectations of voters, which underlie the atgreek-crisis-5titudes of the national governments that depend upon them in a critical election year. The Greek government was elected on the promise that it would successfully resist international pressures for austerity measures, which it could not deliver. German, Dutch and French governments are facing formidable opposition from popular parties that argue strongly for rejecting a ‘transfer union’.

We argue that the clash of cultures evident at voter level pinpoints the fundamental weakness of the single currency experiment. Even if the Greek crisis is resolved temporarily, again, that weakness remains unresolved – and unresolvable. Such crises will recur, and grow deeper, because the underlying ambition of the EU and its followers, to complete economic union, cannot be reconciled with the desires and expectations of its citizens. greek-crisis-8

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