Complacency, rather than panic, is the biggest danger in the latest euro-crisis.
FROM POLITICO | APRIL 20, 2015
As Greece squeezes by without a “Grexit” — earlier this week eurozone ministers approved a four-month bailout extension— markets, politicians, pundits are far calmer today than they were a few years ago. Back then, in the fall of 2011, the prospect of a eurozone without Greece sent global markets into turmoil. Granted, it was bad year, what with a near-U.S. debt default and pervasive fears of a European Monetary Union undone by mountains of bad bank debt. By late November 2011, international credit markets were exhibiting the same danger signs of stress that followed the collapse of Lehman Brothers in September 2008, and it appeared that the long-feared next stage of a global financial implosion was at hand. It took the simultaneously actions of the world’s central banks, followed by a “final” bailout of Greece by the “troika” of the IMF, the European Central Bank and the Eurozone countries to the tune of 240 billion Euros.
Now, in the latest chapter of that on-again, off-again crisis, we face something close to the opposite reaction. There is a level of complacency in global financial markets and among world leaders that may be as irrational and extreme as the panic was three years ago. It’s not that there is high likelihood that Greece can throw the global financial system into chaos. But there is at least a possibility — however minimal — and that risk should not be taken lightly, nor should it be courted simply to sate the ideology of austerity.
Even with the four-month extension of credit, the newly minted Greek government led by the left-wing Syriza Party faces a stark choice: cave to pressure from the German government et al and swear fealty to the austerity conditions imposed in 2011-12, or take steps to remove Greece from the eurozone.
But the recent bout of brinksmanship between Germany and Greece raises a simple, pungent question: Is it really worth the risk, just to stand firm on the principle of austerity? Is Greece worth gambling the future of the eurozone, and by extension the stability of the global financial system—not to mention the fragile health of a still-barely-recovered U.S. economy as we head into the 2016 presidential campaign?
You would think that the answer should be clear. No, it is not worth the risk of an implosion. No, Greece, with its 11 million people and around $400 billion of debt, is not important enough in the grand scheme to imperil the economic stability of the eurozone and indeed the whole European Union with its $16 trillion of official GDP, and its nearly 500 million citizens. And no, the principle of Greece abiding by its obligations and reducing its debt-to-GDP ratio–seen as so imperative by the austeristas–should not be sufficient to imperil the financial stability of the entire world, a tenuous but real stability that would be, at the very least, rocked by eurozone turmoil.
And yet judging from the rhetoric coming out of the German government and much of the German press, along with assorted other voices in the European Union, that answer is anything but clear. According to the reliably dour and dogmatic German finance minister, Wolfgang Schauble, speaking last week in response to the attempts of his Greek counterpart, Yanis Varoufakis, to renegotiate the terms of the 2011 bailout: “Nobody is forcing anything on Greece. … But the obligations apply.” In other words, the Greek government, elected to reject the conditions of austerity from 2011-2012, must accept those conditions or run out of money.
It is easy to spin a meltdown scenario: The Greek government decides that the humiliation of further dictation is not politically or economically tenable. It decides to reject the bailout conditions, and leave the euro. That then emboldens like-minded voices in Spain to force the Spanish government to renege on its own austerity pledges. Sovereign yields on outstanding eurozone debt for Spain begin to spike, and more troubling, so do Italian yields, which represent a much larger issue. Money also begins to flow out of euro-denominated debt and equities and into the perceived safety of U.S. Treasuries, and to a less extent, U.S.-listed stocks, which pushes U.S. interest rates down sharply just as the Federal Reserve begins to raise short-term rates. The result is a complete muddle, and perhaps the economically dreaded “inverted yield curve” or short-term rates exceeding long-term rates, which is typically a sign of a looming recession or worse.
This scenario may not be likely, but it is plausible. And it is being risked for what? So that an increasingly nationalist German press and dogmatic elements of the government, along with equally dour northern allies in Europe, can tsk-tsk the Greeks for the error of their past ways, for epic corruption and taking on too much debt, and then insist that debt reduction is the only path to economic virtue and forgiveness. Instead of easing the language and giving the new Greek government some room to claim that it has honored its election pledges to remove the more onerous conditions of the bailout and attend to the needs of the average Greek citizen, the German-led champions of austerity are seizing on the moment to stand on their antiquated principles, even if those principles result in a Greek exit and untold economic damage.
If ever we witnessed an unnecessary, self-made crisis, this would be it. And why? To deliver the abstract lesson that rewarding bad behavior creates a moral hazard. What exactly is the point of even allowing for the possibility of a meltdown? Ideological purity? Moral dudgeon? Punishment? And truly, can anyone argue that the Greek economy and millions of its people have not paid a significant penalty?
Let’s say the goal of Germany is different. Perhaps it is to force Syriza to tackle structural reform, deal with a corrupt Greek oligarchy that has harmed most Greek citizens and saddled the eurozone with crisis. Even here, however, pushing Syriza to the brink is hardly worth the possible consequences. This is not just a European issue. It affects the world, and could alter the course of the U.S. economy. If there is even more flight of capital from the eurozone to the dollar, and if that then shapes U.S. interest rates as well, the American economic trajectory could be muddied, to the point where it shapes U.S. domestic politics and not at all for the better. And why give fodder to those who oppose pending trade pacts simply to insist that Greece be better?
At each moment of approaching the abyss in the past five years, the German government led by Angela Merkel, and indeed the entire eurozone, has found a way to do just enough necessary to avoid tumbling in and to keep the eurozone together. Those moments, however, occurred when crisis was evident. The risk now is that because the perception of risk is rather low, the super-hawks—those who never supported the Greek (and other) bailouts—can demand whatever they want, and that may pose a deeper threat to this troubled eurozone experiment.
Maybe the Greeks will cry uncle and abide by the conditions demanded; maybe they will leave the eurozone and that will serve as a needed purge that will make the remaining union stronger and more aligned and all will be fine. But then again, maybe not, with quite unpleasant consequences and not just for Europe. The price we would all then pay for the ideology of austerity would be large. That may a risk the German government and others are willing to take, but it is one that the rest of the world should resoundingly and loudly reject.