Euro Crisis: If Greece Exits Europe is it the End of the Euro?

Euro ManImage by rockcohen via Flickr
It looked like the Euro crisis was finally on the mend when Greek Prime Minister Papandreou threw a spanner in the works, on the eve of the G20 meeting. 

His proposal to go to the Greek people with a referendum about the austerity package agreed to by the European Council on 27 October caused a slump in the markets and a political furor across Europe and the world - a collapse of the Euro would impact everyone, the US included. 

Merkel and Sarkozy immediately called Papandreou to order and he dutifully flew to Cannes on the eve of the G20 meeting to explain himself.

There are times when I wonder whether Germany and France are the new Axis of Evil in Europe calling all the shots and trampling on national sovereignty, or whether they are what they pretend to be: the saviors of the Euro?

I prefer to think that Merkel and Sarkozy are convinced Europeans - they certainly look like a minority among politicians in Europe because here in Italy, there is no doubt that Berlusconi hasn't got Europe at heart, nor his own country.  And this no doubt goes a long way to explain Italy's absence from European leadership. If the Euro and Europe are in the hands of Sarkozy and Merkel (and of course the EU's van Rompuy and Barroso), it's because Italy's Prime Minister hasn't paid attention to anything beyond bunga bunga and his own personal interests. 

Now, is Papandreou also a non-European? Not at all. He said to Merkel and Sarkozy just what you'd expect him to say: Greece is a democracy, Greek parties are stuck in an unmanageable opposition. His own party just lost another two members and now he can only count on 151 out of 300 for the vote in Parliament that will take place this coming Friday. 

For him it makes sense to bypass the parties and consult the people. But not for most people around him including his Finance Minister. 

Merkel and Sarkozy did not appreciate either and told him Greece would not see any European money until the situation was cleared up.

Now there are two ways the situation could clear up:

(1) if the Greek Parliament votes yes on the 27 October European help package (they have to do it this coming Friday), then the referendum will take place on 4 or 5 December, asking the people the same question the Parliamentarians answered (i.e. do you accept the proposed austerity measures in exchange for saving Greece from default - actually a 50% "haircut" on Greek debt is already included in said package).

(2) if the Greek Parliament says no, then there's no need for a referendum: the European austerity package is rejected, the  political crisis is opened. Europe will not pay any further money to save Greece from default.  Greece will need to go to early elections to put its house in order (i.e. decides on whether it really wants to apply austerity policies or not).

How early? Even if one rushes things through, you can't expect to hold elections in a democracy in less than two months. That means sometime in January or February 2012. Plus you need the time to re-discuss the European austerity proposals and adopt a policy both at the level of the new Parliament and the new government. In short, nothing can move before March or April, way too late to save Greece financially. 

Snap elections are not the answer. Why add the referendum to the process? It's clearly a non-needed step. But Papandreou probably felt politically fragile. He wanted to get rid once and for all of that social tension that had been building up through the summer.

I'm willing to wager Papandreou didn't expect so many to rebel to the referendum proposal in the Pasok (his own party), including his all powerful Finance Minister. The idea didn't appeal to the man in the street either. Various TV channels interviewing at random people in Athens found that most felt a referendum was too late, that the people should have been consulted earlier in the process.

Now that's a pernicious idea. The idea of consulting people is a recurrent one but, let's face it, so far European construction has NOT been built on a series of referendum (with a few exceptions that were never a success). The process has always been built on existing democratic institutions (i.e. votes in parliaments) and there really is no reason why this should change. Either you believe European member countries have working democracies or you don't... 

Why did austerity packages go down so well in Ireland and Portugal and got stuck in Greece?

Because the opposition in Ireland and Portugal agreed austerity was the way to go. In Greece, the opposition did not. Street protest and strikes were a constant throughout the summer. And small wonder considering the sacrifices that will be demanded (but not yet imposed) - not to mention a soaring level of unemployment, now close to 20 percent. The economy is frozen, exports are down. For a lot of Greeks, the Euro looks like a very bad idea. 

When the government runs out of money at the end of this year and will stop paying its dependents, it will look like a very bad idea indeed. 

Because leaving the Euro and moving to the Drachma is not going to be painless. On the contrary. Banks will fail. People's salaries will go unpaid. Distribution of goods will be disrupted. It will look like World War III.

Is that what the Greeks want?

Yet...From a purely abstract point of view (that's the economist in me speaking) it is very likely that the Euro can easily survive without Greece and Greece can better survive without the Euro: the reborn Drachma would be so cheap that Greek exports would be boosted sky high! 

Withdrawal of the Greek economy from the Euro-zone is not likely to permanently affect the Euro because, put quite simply, it is too small in relation to the whole. It would hurt the Euro no doubt but not kill it.

I know - we are grappling here with the "unthinkable". The Euro wasn't supposed to be something you could get out of at will. It was - as so many commentators repeatedly say - an irrevocable choice

Is the Euro really an irrevocable choice?
Quite frankly, nothing is irrevocable in life, and especially not contracts humans get into.

But the Greeks should keep firmly in mind that the road to the Drachma will be a long and hurtful one. Are they willing to walk down that road?

Are they willing to get out of Europe?

Because that is the exquisitely political - and dramatic - choice they are now facing.

Unless Papandreou withdraws his referendum proposal. I wouldn't be too surprised if he did, though perhaps he can't do it without losing face... 

Post-scriptum: on Thursday 3 November he withdrew it! Not afraid of losing face, it seems...On Friday 4 November he won a vote of confidence from Parliament but the Greek crisis will not go away with political games. Any new government of coalition drawing in the opposition  will still have to deal with the same issue.

All bets are open. What is your opinion?  
Will Greece exit the Euro? 

My opinion is that it won't but do you think I'm too optimistic? Do you think Greece will make the necessary sacrifices, including the necessary reforms, to stay in the Euro-zone?

Enhanced by Zemanta