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Why Greece May Be the New Lehman

από | 23 Απρ, 2015 | ENGLISH | 0 Σχόλια

Here we go again. This time it’s Europe’s fault, and the crisis could be worse than last time, at least politically.

By BILL EMMOTT, Politico

Remember when in 2008 Hank Paulson’s U.S. Treasury Department decided to let Lehman Brothers go down, pour encourager les autres, and then found that it brought les autres crashing down too? Well, Germany and the other euro-zone members are now trying to repeat that brilliant trick with Greece. If you were looking for where the next big financial meltdown might begin, you need look no further. Chances are, it is about to happen in Europe.

If it does, the political consequences could be even worse than last time. Strangely enough, the political risks are easier to evaluate than the economic ones. The risk of a Greek default or exit from the euro begin in Greece: If the left-wing party that runs the new government, Syriza, is discredited, following the discrediting of the old establishment parties, this risks strengthening the fascist alternative, Golden Dawn.

Then, the political risk moves rapidly to France, which is the scariest country in Europe right now. Already, the 25 percent share of the opinion polls held by the anti-immigrant, anti-EU Front National party of Marine le Pen is scary. But imagine what a new political and economic crisis in Europe might do for Ms. le Pen: her chances of becoming France’s president in 2017 would jump from remote to conceivable.

Another risk is that Europe’s banking system remains fragile, not cleaned up and reinforced in the way America’s banking system has been since 2008. As long as the European Central Bank stands ready and able to print money in order to provide the banking system with liquidity this should remain true. But what if that were to be blocked? Which it might be, if German politics react badly and severely to a Greek default.

Then, we could be in a repeat of 1931, when the collapse of a European bank, CreditAnstalt of Vienna, brought about a sudden worsening of the depression that was taking hold in America and Europe. We are all connected now.

This isn’t the way things looked, quite recently. Back in January, when Greek voters elected Syriza on a mandate to get a better deal from its euro-zone partners and the International Monetary Fund over its vast public debts, the favored metaphor of most commentators was the game of chicken.

Greece’s photogenic prime minister, Alexis Tsipras, and especially its economics professor-turned-sex-symbol finance minister Yanis Varoufakis talked tough, and their German counterparts Angela Merkel and Wolfgang Schaueble talked tough in return. But everyone assumed that in the end there would be a compromise and not a car crash.

The euro would survive. Greece would not default, would pretend to continue to repay its public debts (now 170 percent of GDP, a colossal level), and would be stealthily given some economic life support. This would buy time for the Greek economy to start growing more rapidly, convincing the Greek public to accept reforms such as privatization.

That acceleration in growth would convince the German public that a country they previously saw as lazy good-for-nothings was willing to play by the rules. A little money would be provided to ease Greece’s transition from slothful parasite to competitive modern nation. Everyone would live happily ever after.

It was a comforting fiction. But now, three months later, reality is about to reassert itself. The car crash is looking the much likelier outcome. And the scary thing is that both sets of drivers appear as if they might even want it.

Which means that they are both assuming that the political and economic consequences of Greece either defaulting on its sovereign debts, or leaving the euro, or both, would be bearable and even worth bearing.

It would be nice if this pessimistic analysis were to be proved wrong, and that a compromise were about to be unveiled. The reason why that at present looks unlikely is not just that there is no sign of it happening: such is always the nature of bargaining, at any level. No, the reason for pessimism about a compromise is that as time has gone on, the two sides appear to have found themselves with less room for manoeuver, not more. They both look trapped.

Greece, after all, has undergone an extraordinary economic and political shock since the global financial crisis struck in 2008. Its clientelistic, extravagant political culture, which had been no secret, hit a wall: it ran out of money. The result was a slump in GDP of more than a quarter, a jump in unemployment to nearly 30 percent of the workforce (roughly, U.S. Great Depression levels), and a huge budgetary contraction. The question for the new Syriza government has been: what more could we do?

Bill Emmott is a former editor-in-chief of The Economist and the executive producer of a new documentary about the crisis in the European Union, “The Great European Disaster Movie.”

 
 

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