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Athens: To big to fail

This weekend the Greek crisis is developing into the perfect storm. There are three immediate problems. Who covers for sovereign debt? Germany demanded that Greece’s private investors (banks, pension funds and insurance companies) should take a haircut, i.e. cover a proportion, perhaps a quarter, of the mooted €120bn second bailout through losses on their investments. The ECB, France and the IMF feared that this would cause Greece to be declared in sovereign default (dubbed the Lehman Brothers moment), leading to panic in the international financial markets. Merkel has since given way on this. Then, secondly, there is the uncertainty whether Papandreou’s new cabinet can get through parliament the EU-inspired austerity measures demanded as a condition for this new bailout. And third, both of these pro tem measures may only apply for a limited time, so what is the long-term solution that can finally settle this inexorably deepening Eurozone crisis?

Now that the German Chancellor Merkel has blinked, largely because of IMF threats to withhold other essential funding if she did not, a default and devaluation (however unlikely, with debts redenominated into the drachma which would instantly be deemed to have junk status) have for the moment been avoided. What Athens now wants is a second bridging loan with its debts rescheduled over a longer period to reduce the interest payments. The trouble is, this still doesn’t deal with the structural weaknesses of the Eurozone.

There are effectively only two solutions here. One, which has always been latent since the Euro was launched, is full EU political and monetary union which, as with the US federal union, would facilitate the necessary resource transfers within a single fiscal area. That was always the ambition of the Euro federalists, but is simply not realistic at the present time. Nor is the other possible solution any more likely in the short term – a two-tier Europe with the strong inner core (Germany, France, Benelux, and Scandinavia) linked to a weaker periphery through fixed but adjustable exchange rates.

Something therefore has to give. All countries are determined to avoid a Greek collapse which would wipe out the Greek banks, severely damage German and French bank investors, crash the markets, and precipitate a fire sale of assets in Portugal and Ireland and perhaps Spain and Italy too. But it could still happen. Or Merkel could find the latest package, largely underwritten by Germany, undeliverable with her own electorate already spitting venom over the previous Greek, Irish and Portuguese bailouts. Or the resistance to ever deeper austerity on the Greek streets could render Greece effectively ungovernable. Something has to give, but what?

One Comment

  1. Nymne says:

    As this blog is termed Left Futures, it would have been desirable to see some more of ideas for democratic and populistic route of action. Some kind of strategy to curb financial sector predator behavior? Any kind of solution that would benefit the Greek people rather than yet another description of the state of affairs. The left really suffers from total lack of visions and that pisses me off!

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