Less than a week after European leaders put a bow on their debt-restructuring plan for Greece, the nation's internal politics have devolved. The prime minister's ruling party is fraying over his call for a referendum on the E.U. debt deal. Will the collapse of the Greek government destroy the euro zone?
The Euro Will Survive
Vanessa Rossi is an economics adviser to Oxford Analytica.
The euro zone is now furiously bracing itself for the likely collapse of the Greek government. Faced with the prospect of Greece voting for a fully fledged default and euro exit rather than last week's debt deal, the remaining euro zone members must themselves choose: stick even more closely together or be pulled apart. They will stick together -- and survive.
However, the euro zone’s survival has very little to do with Greece. The Greek economy is too small to cause any noticeable impact on the euro zone and even the widespread and substantial financial contagion of a default can be absorbed. Last week's debt deal may not appeal to Greece, but the beefed up bailout fund is capable of taking care of the immediate consequences of a Greek default. Containment has been addressed and would focus on supporting other indebted states.
The key reason for Greece continuing to play an important role in deliberations over the euro zone’s future is that it highlights the question mark over member states’ abilities to resolve the deep rooted problems of poorly performing economies. The influence that Greece can still wield is a demonstration effect: If Greece leaves, will the result be disastrous or could the economy be galvanized into a better performance, as those who favor exit appear to believe?
The euro zone’s survival has little to do with Greece except to persuade other members to redouble their efforts and stick with the euro.
Given Greece's economic structure and historic track record before entering the euro, which are very different from those of non-euro E.U. states like Britain and Sweden, its prospects outside of the euro zone do not look bright. The immediate effects of default, of the government becoming
Adding to the Uncertainty
Aristides N. Hatzis is an associate professor of law and economics at the University of Athens. He is the founder of the Greek Crisis blog.
For the already embarrassed Greeks, this is a new low. The prime minister's brinksmanship has pushed Greece over the edge.
What’s wrong with a referendum? After all, the Greek people would have the chance to vote on the euro rescue plan and determine the future of their country for the first time since the May 2010 bailout. Unfortunately there are many problems:
Now Greece is asking the Continent's leaders to wait for an elusive referendum. Will they?
First, the referendum comes too late. Greeks should have had this chance 18 months ago. Then, there was a real choice: default, international isolation and brutal, abrupt spending cuts, or a bailout with austerity and a long recession.
Second, this proposal begins a ghastly game of chicken. Prime Minister George Papandreou was irresponsible to propose a referendum this week, but the reaction of the opposition was more irresponsible. Even members of its own party saw this as their last chance to ensure their survival in a post-Papandreou world. One wonders what he was thinking, playing a game like this in a political system in which opportunism is the norm and political leadership is as rare as clean streets in Athens.
And finally, even if Papandreou manages to survive and put together a referendum (highly unlikely), there is a great chance that the Greek people will vote against the European plan for a simple reason: Where everybody in Europe sees a 50 percent haircut, Greeks see more austerity.
At this point an imminent collapse of the Greek government would bring chaos, which could lead to a disorderly default and thus the financial (and political?) collapse of Greece -- not only because the euro membership has been thrown into jeopardy, but also because a lot of people are determined to bring on the catastrophe and very few are stepping up to make sacrifices to prevent it.
Of course Papandreou’s gamble stunned Europe and the markets. The whole situation threw into question the effort to contain the euro zone’s sovereign debt crisis. Even before the bombshell, the markets were quite skeptical of the euro rescue plan. The euphoria after European leaders announced it lasted only a split second; doubts started to grow from the very beginning. The European Central Bank's president, Jean-Claude Trichet, called for a “swift implementation” if financial stability is to be restored. But now the Continent's leaders would have to wait for an elusive referendum in Greece. Will they?bankrupt, would probably be a 20 percent to 30 percent fall in domestic demand and a 5 percent to 10 percent drop in gross domestic product -- it could take years to recover from this shock. The most likely impact on the euro zone will be to persuade members to redouble their efforts and stick with the euro.
This Could Be the End of the Euro
Edward Harrison is a banking and finance specialist at the economic consultancy Global Macro Advisors. He is also the principal contributor to the financial Web site Credit Writedowns.
Papandreou's decision to call a referendum has put the Greek government at risk. Indeed, the government may collapse before any referendum is called.
But the decision was necessary because austerity is deeply unpopular in Greece and has already caused tremendous social unrest. The new deal would see a cut of 100,000 government positions and the permanent presence of the European Union, the International Monetary Fund and the European Central Bank to ensure compliance. Given the widespread perception among Europeans that the E.U. system is undemocratic, there was no alternative but to put these measures to a vote to ensure their political viability in an already volatile social environment.
Unless the E.C.B. acts as a lender of last resort, it is game over for the euro zone.
Given popular sentiment (60 percent are opposed to the measure), a referendum would likely fail. Greece would default with higher bondholder losses, triggering credit default swaps and crystallizing losses across the European (and U.S.) banking system. Greece and its banks would be insolvent. A "no" vote would also mean even greater immediate austerity as Greece would be cut off entirely from external funding sources.
Will the collapse of the Greek government destroy the euro zone? It certainly could. Italy’s recoupling to the periphery is well-advanced, making it now the focal point of the sovereign debt crisis. Bond yields in Italy and elsewhere in the European periphery have skyrocketed. Contagion has spread to the banks as well.
Meanwhile, the euro zone has already started a double dip recession, which will cause Portugal and other periphery economies to miss their deficit targets. Redoubling austerity efforts under those circumstances means civil unrest would likely spread to these countries as well.
The E.C.B. has been forced to intervene for Italy. However, the damage is already done. Unless the E.C.B. acts as a lender of last resort, it is game over for the euro zone.
Not Too Late for the Euro’s Core
Desmond Lachman, a resident fellow at the American Enterprise Institute, is a former managing director of Salomon Smith Barney and a former International Monetary Fund economist.
Mark Twain famously observed that while history might not repeat itself, it often rhymes. As if to bear him out, economic and political developments today in Greece are bearing an uncanny resemblance to those in Argentina in late 2001. Those developments led to Argentina’s disorderly default and ignominious exit from its supposedly immutable U.S. dollar exchange rate peg in early 2002.
The euro might survive, but in a form that excludes the troubled countries in the European periphery.
Mr. Papandreou’s desperate gamble to now call a referendum has to be seen against the backdrop of a Greek economy in virtual free-fall under the weight of I.M.F.-imposed austerity and a country bordering on ungovernability. His highly risky gambit will almost certainly lead to the fall of the Papandreou government, which will compound Greece’s already chronic economic and political woes. If Argentina’s experience is any guide, economic and political collapse will render it all but impossible for Greece to avoid a disorderly default and, in time, a euro exit.
For over a year now, the European Central Bank has been warning that a Greek default would trigger contagion to the rest of the European periphery, including most importantly Spain and Italy. The increase in Italian bond yields to record levels over the past few days — despite E.C.B. intervention and despite the creation of a supposed firewall at the recent European summit — does not augur well for Europe’s economic outlook. This will make it all the more difficult for countries in Europe’s periphery to grow their way out of their chronic debt problems.
Given the enormous political and economic stakes involved, one has to expect a huge effort by the European political elite to preserve the highly successful European experiment of the past 60 years. However, considering the increasing visceral antipathy of European electorates to bailing out the periphery, it is difficult to see how Portugal, Ireland and Spain can be saved from Greece’s path to default. It would seem that the best for which one can hope is the survival of the euro but in a form that excludes the troubled countries in the European periphery.
A Referendum Spells Trouble
Daniel Gros is the director of the Center for European Policy Studies in Brussels.
Sovereign debt is debt of the sovereign — and this sovereign can simply decide not to pay.
Investors in euro zone bonds now know: when 'we the people' are asked to pay, they are likely to say no.
This was the key message when the Greek prime minister announced that the country would hold a referendum on the most recent rescue package agreed at the European Council of last week. Investors in euro zone bonds have now been put on notice that when the going gets tough, the real sovereign — “we the people” — might be asked whether they would like to pay, and are likely to say no. Greece might simply be the first to take this approach; nobody can guarantee at this point whether Portugal or Italy might be next. The result is predictable: a soaring risk premium for any debt from such periphery nations.
This decision to invoke a referendum could thus mean the beginning of the end game for the euro.
It also implies that all those grandiose plans of creating a political or fiscal union to support the euro have one fatal flaw: governments may sign treaties and make solemn commitments to subordinate their fiscal policy to the wishes of Brussels (or to be more precise the wishes of Germany and the European Central Bank). But in the end “the people” remain the real sovereign; and they can choose to say no. They can also topple the political leaders who push for European unity and austerity, as is happening in Greece with the confidence vote against the prime minister and his referendum.
The E.U. remains a collection of sovereign states and cannot send an army or a police force to enforce its pacts or collect debt. Any country can leave the E.U., and of course the euro area, when the burden of its obligations becomes too heavy. Until now, it had been assumed that the cost of exit would be so high that it would not even be considered. No longer.
One should not forget that the U.S. had to settle this question of exit from a union in a bloody civil war. In Europe only ink will be spilled, but the economic cost will be immense.
Let the Greeks Save Themselves?
Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.
The Greek prime minister announced that he would seek the opinion of his people by calling a referendum on the price they would have to pay, in the form of austerity measures, to get a second European Union bailout. Does this mean the end of the euro zone? Well, at this point a happy ending for the euro bloc seems increasingly unlikely.
Why it might be in Greece's interest to leave the euro zone.
First, contrary to what the headlines led us to believe, the details of the agreed-upon E.U. bailout package weren’t set in stone. That means it was unlikely that this deal would actually have saved the euro anyway. Second, the referendum would give the Greek people the option to choose between more austerity measures directed by the E.U. bailout or to roll the dice and continue on the current path. At this point, it looks as if they will reject austerity. That vote — or even the signal sent by the referendum announcement — then increases the risk of a default.
As Tyler Cowen of George Mason University noted a few weeks ago, a default probably means an exit from the euro zone. Also, leaving the euro zone could, in theory, benefit Greece. Cowen explains that the default may reinforce the idea that the government isn’t that committed to its banking system, which “will lead to a continuing exodus of deposits from Greek banks. It’s not clear how the Greeks can stem that additional pressure.”
Under one scenario, leaving the euro proactively could alleviate the pressure and, as Cowen says, allow Greece to start “the process of Greek bank recapitalization, long and painful though it might be.”
Of course, there is a slight chance that a transparent Greek default and euro exit (followed by Portugal?) may help preserve the monetary union for those countries that remain in it. Months of market turmoil would follow but in the end Europe could stand on firmer ground.
Unfortunately, this is unlikely. Today, Greece is still borrowing money to pay for its daily consumption; a default would mean even more austerity measures, which could lead to severe social unrest, if not worse. And then we have Italy. No reason to be optimistic there (120 percent debt-to-G.D.P. ratio and a 10-year yield was up to 6.31 percent). The collapse of Greece followed by Italy could quickly bring the whole union down.
Sadly, we may soon have the answers to our questions.