Monday, June 18, 2012
This time last week, European politicians were rejoicing that stability had been restored both to international markets and to European Union politics by the Spanish “bailout.” That rejoicing lasted less than half a day. By the closing of Wall Street last Monday, the markets were again demanding punitive interest for lending to Spain.
Early this morning, when America was still asleep, the initial response to the Greek election results — a victory for the pro–euro zone, pro-bailout New Democracy party — was a modest rise in Europe’s stock markets and a slight rally in the bond markets, with Spanish, Italian, and Greek yields all falling slightly, in that last case to 25.38 percent. Italy’s “technocratic” prime minister, Mario Monti, commented buoyantly on arriving at the G20 meeting: “This allows us to have a more serene vision for the future of the European Union and for the euro zone.” An hour later, the markets were demanding ever-higher interest rates from both Spain (the highest level so far at 7.1 percent) and Italy (6.1 percent and rising), and those paid to predict future trends were all saying that the news from Athens had changed nothing.
They were wrong. The Greek elections were the worst possible outcome for the euro, for financial stability, and perhaps even for German chancellor Angela Merkel. Mrs. Merkel was quoted as sternly informing the Greeks on the eve of Sunday’s election that there was no prospect of renegotiating the “deal” — severe public-spending cuts in return for loans from the European Union, a “haircut” of 75 percent imposed on those investors who had foolishly lent Athens money, and the fig leaf of a denial that these amounted to a default by Greece. On the face of it, her comments looked like a threat designed to drive the Greeks into the arms of the New Democracy party. But perhaps they were designed to be an irritant that would drive the Greeks into the arms of the anti-bailout far-left party Syriza.
A Syriza victory would almost certainly have forced Greece out of the euro. Its policy stance — staying in the euro, refusing to pay back loans, demanding more of them from Germany — was so plainly absurd that it would have enabled Merkel to maneuver Greece out (with or without a bribe to go). That would have strengthened the remaining euro, given German voters some excuse for Berlin’s continued shelling-out of subsidies to Spain, Italy, and other weak sisters, and — as a bonus — derailed the Euro-Left’s campaign, led by French president François Hollande but largely inspired by Syriza, to replace austerity with growth as the EU’s new economic “strategy.”
“Growth” in the mouth of the Left is a synonym for more public spending. It offers no real prospect of stimulating the greater productivity that alone obtains growth without inflation. It cannot possibly surmount the barrier represented by the massive currency overvaluation of Mediterranean countries inside the euro. But when all the economic indicators are down, it would certainly be attractive to voters, and it might enjoy a brief illusory “success” before it ran into higher inflation and investor flight.
Syriza’s usefulness to conservatives is its candor. It voices the primitive instincts of Europe’s Left. As John O’Sullivan wrote in a recent issue of National Review, it translates into policy the fun-anarchism of Italian playwright Dario Fo: “Can’t Pay? Won’t Pay!” No government within hailing distance of reality can endorse that. But Hollande, newly strengthened with a parliamentary majority, actually proposes a diluted and more respectable version of it. Others on the left — for instance, Labour’s Miliband in Britain — are rallying to his banner. At best, therefore, the EU is likely to be divided and maybe paralyzed over broad economic policy for some time, probably until Hollande’s policy either collapses or is abandoned behind a smokescreen of cultural-Left gestures.
Meanwhile, the euro problem will remain un-fixed while the Greek tragicomedy staggers on for a few more acts. Let us assume that a new multi-party government is formed under the leadership of New Democracy, which then negotiates a slight loosening of the terms of its relationship with Berlin — an extended debt-repayment schedule, perhaps. That would not even give it breathing space. Greece’s main problem is that its currency overvaluation within the euro is on the order of 30 percent or more. Any new government — however successful at restoring the nation’s public finances — cannot possibly improve the productivity of Greek workers by one-third in any space of time. The more the EU softens the terms of its assistance, moreover, the less incentive Athens will have for trying. And the harder it tries, the more likely it is to provoke social unrest, to strengthen Syriza, and to weaken the commitment of the main center-left party, Pasok, to its governing partners and the deal with the EU.
None of these developments will make Greece more attractive to investors. So the euro-crisis will sputter along until Greece leaves the euro. Ideally, there would eventually be a managed departure not only of Greece but also of other Mediterranean countries suffering from overvaluation. Maybe a neat split into “northern” and “southern” euros. Failing that, there could be a chaotic collapse of the whole system amid sovereign-debtor defaults, banking chaos, and a wider crisis for the EU. Those who are most committed to keeping the euro in its present state, with all its current members, in the name of “ever closer” union, are those most responsible for magnifying the risks.
How it will all end, knows God.