From the sidelines, the US is watching the unfolding Greek tragedy with growing horror. It must stand ready to assist as the euro breaks apart.
Jeremy Warner, assistant editor of The Daily Telegraph, is one of Britain’s leading business and economics commentators. A serial winner of awards, he has also been honoured for an “outstanding contribution in defence of freedom of the media” by the Society of Editors for his refusal to reveal sources to Government inspectors. He is @jeremywarneruk on Twitter.
It would be the third time in a century. Will America once more end up having to save the fratricidal Europeans from themselves? In Washington, there is a sense of events spiralling out of control, and of again getting drawn into Europe’s centuries old propensity to self destructive madness.
The EU’s evident inability to contain the geo-political ambitions of Vladimir Putin may be the most visible of America’s latest concerns, but the more immediate danger centres on the stand-off with Greece, which grows uglier by the day. Greece’s latest overtures to the Russians make the situation seem more alarming still.
Tuesday’s apparent olive branch from Greece’s celebrity finance minister, Yanis Varoufakis, is in truth no compromise at all, despite the evident relief it brought to financial markets; it was merely the same demands dressed up in more acceptable language. Speculation of a six month programme extension was also fast slapped down by the German finance ministry.
To my mind, this is not a game Greece can win, if only because it is also not a confrontation which politically Berlin can afford to lose.
As an inherently unstable alliance of communists, Trotskyists, Maoists, nationalists, idealists and libertarians, the new Greek government is likewise most unlikely to back off. The only thing that unites them is a crusade like determination to over-turn Europe’s austerity agenda. They would rather exit the euro than admit defeat, even though this was not the mandate on which they were elected.
American concern is two headed. Partly, it’s economic. Europe has managed to get itself locked into a wholly unnecessary, policy induced, contractionary dynamic which is feeding social and political unrest and puts at risk more than 60 years of economic integration.
The immediate, direct costs of a Greek exit from the euro may not any longer be that big, but once it is appreciated that monetary union is indeed reversible, the wider risks of contagion are plainly high; the world economy, together with America’s still fragile recovery, need another major credit shock like a hole in the head.
Yet the bigger worry revolves around the supposed geo-political consequences of Greek expulsion from the euro. Looking back at the history of Greece’s “fast track” entry into the European Union, without pre-conditions – and then later the euro, when the entry rules were similarly waived or manipulated – it was all about political enlargement, European security, cementing democracy in this Balkan outpost, and establishing a bulkhead against Russia and other potentially hostile forces to the East. It was “manifest destiny” that drove the process, not economic compatibility.
Greece’s economic woes by numbers
These purposes have been put at risk by Syriza’s election victory. Greek expulsion, and the immediate economic chaos that would follow an involuntary exit, threatens to create another failed state on Europe’s doorstep, one that could all too easily fall into the welcoming embrace of Putin’s Russia, if indeed the anthoritarian Kremlin could tolerate these new age lefties.
Not with standing these risks, it seems ever more evident that other members of the Eurozone would rather Greece was out than in, or at least their governments would. There is an element of damn the consequences; we are not going to be held to ransom by a bunch of upstarts playing 1970s-style university campus politics, complete with all the unfathomable schisms that tend to afflict the hard left.
Watching from the sidelines, America views the latest pile up with mounting horror. The US is often ridiculed for the grid-lock of its system of government, but Europe has taken political bloody mindedness to an altogether different level. With Greece always somewhere close to the epicentre, Europe has stumbled from one crisis to the next for more than five years now, unable to find lasting solutions.
To the American way of thinking, this apparent state of stupor is close to incomprehensible. This is not to argue that Americans are all at one on the economic remedies; far from it.
Yet after much trial and error in there own backyard, there is a degree of American “salt water” consensus around how to deal with a debt crisis of the type that afflicts Europe. Broadly speaking, it amounts to putting a large enough sum of public and central bank money on the table to make the problem go away. Once the economy picks up, the public money tends to get repaid.
Europe’s refusal to adopt this approach goes to the heart of the problem with Greece. The more the creditor squeezes the debtor, the less likely he is to get his money back. Yet it is just such a contractionary dynamic that has been established between the creditor and debtor nations of the Eurozone. Progressively, it has become like trying to get blood out of a stone.
If we look at relatively successful post crisis fiscal consolidations of any size – in the sense that they have incurred comparatively limited wider economic cost – the two most obvious examples are the US and the UK. In both cases, the consolidation has been counterbalanced by extreme levels of monetary support.
What’s more, considerable fiscal flexibility has been applied, even in Britain, whose Conservative led Coalition almost invented the rhetoric of austerity. In practice, however, automatic stabilisers were allowed to operate and debt targets to lapse. This has left Britain with a lot of work still to do in closing the deficit more so than any other OECD country, according to recent analysis by the Institute for Fiscal Studies but it has also had the effect of smoothing the fiscal adjustment in a growth friendly way. Members of the Eurozone have been denied the same flexibility.
The Whitehouse’s approach to date appears to have been focused on trying to persuade Berlin to compromise and accept the reality of Greece’s can’t pay, won’t pay position. It also wants Germany to ease back on austerity in the round, in the hope of securing wider economic recovery in Europe.
This is unlikely to work. Europe is not a single country, and is still decades away from acting like one. Too much time and energy has already been expended trying to keep the Eurozone together. Even if a way of forestalling the immediate crisis is found, it will only be until the next time. Greece, and perhaps others too, demand different solutions, immediate exit from the Eurozone being the first step, allowing the debt overhang to be redenominated in devalued drachmas, and creditor haircuts to be imposed appropriately.
Greece then needs to be supported with a realistically constituted programme of international support, including American and British bilateral loans, in place of the nonsense imposed on it by the Troika. Without the adjustment mechanism of devaluation, this was always doomed to fail.
After the Second World War, America helped rebuild Europe with Marshall Plan aid. Ironically, a condition of such aid was the reduction of interstate barriers; in a sense, it provided the foundation of the European Union, and for the unprecedented period of European stability and prosperity that followed. How could Europeans have again been so careless with their inheritance?
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