Sunday is ‘moment of truth’ for Eurozone and Greece

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“We should not forget the historic nature of what is at stake.

“Its about whether a country can leave the euro zone and what that means for the future of an incomplete and flawed European Monetary Union.

“Its about whether there may soon be a failed state in southeastern Europe with all the geopolitical consequences that could entail in a fragile region.

“Its about whether the EU’s 58-year-old project of “ever closer union” goes into reverse, and whether the objective forces of economic divergence finally overwhelm the political will on which the euro was founded.

“The United States, China and Japan understand what’s at issue and all have expressed concern that Europeans should find a solution to keep Greece in the euro. Yet at this point, that does not appear the most likely outcome…..

“If European leaders effectively abandon a defiant Greece to its fate, neither the euro zone nor the European Union will be the same again. Some, notably among the growing ranks of Eurosceptics around the continent, will think that is for the better.  The glee with which Nigel Farage, Marine Le Pen and Geert Wilders greeted the prospect of the unravelling of European integration may give euro zone leaders pause.”

This summary from Reuters’ vastly-experienced European Affairs editor, Paul Taylor, expertly sums up the real issues at stake in Sunday’s final Eurozone summit on Greece.

These have been largely ignored in the on-going arguments about Greece’s debt.  Debate has instead focused, understandably enough, on the fact that the Greeks have managed to borrow large amounts of money, at least €322bn ($365bn), and cannot possibly ever repay it.  Even worse, the various Greek governments appear to have done nothing to reduce their future spending, or indeed, even to raise a more sensible amount of tax.

It is no wonder that only 10% of Germans want to handover more money to the Greeks, given the history of previous loans.  The word for debt in German, “Schuld“, also means “guilt” – and it is understandable that Germans and others across Europe now see Greece as a morality play, where the guilty need to be punished for their crimes.

Yet, with all apologies to my many German friends, this is not the real issue on Sunday:

  • Last Saturday, 1600 Syrian refugees landed on the Greek island of Lesbos.  Many more thousands are on their way.  If Greece leaves the Eurozone on Monday, who will run the reception camps where these migrants now live?  Nobody, is the likely answer.  The Greek government will be unable to feed and protect their own population, so why should they devote precious resources to these people?  Inevitably, therefore, Greece will become an open door for increasing numbers of Syrian/Libyan and other migrants into the European Union
  • Equally important is the future of the Eurozone itself if Greece is to be abandoned to its fate.  It will then be clear to everyone that it is no longer a currency union, bound together by treaty obligations. Instead, it will have become just another exchange rate mechanism, like its ill-fated predecessor the Exchange Rate Mechanism (ERM).  Its fragility was summed up by  the UK’s finance minister, who boasted that he went home that evening after leaving the ERM and “was singing in his bath”.
  • The third reason why the Eurozone should pause is that Greece in many ways is just the ‘canary in the coalmine’, warning of the flawed construction of the Eurozone itself.  As I have long argued, Eurozone leaders should never have set up economic and monetary union without political union.  They knew this at the time, but they ducked the issue.  Now it has come back to bite them, hard.  And if Greece goes, we can be sure that others will follow them, if this fundamental flaw in the design is not now fixed.

Of course it will be difficult for resolve all the long-standing issues created by the Greek crisis on Sunday.  But as the Chinese proverb says, “a journey starts with a single step”.  And the facts are at least clear:

  • Everyone knows that Greece will never pay its bills
  • Everyone also knows that Greece will immediately default on its debt if it is forced to leave the Eurozone
  • And everyone also knows that taxpayers in the richer Eurozone countries will end up paying the bill as a result – Germany will end up paying at least €86bn, and probably much more

So why take this pain for no gain?  Why not instead deal with the cause of the problem – the lack of political union.  Why not admit, as Paul Taylor argues, that the Eurozone is “incomplete and flawed”?  And having recognised reality, then use the crisis to make a fresh start by agreeing a more sustainable basis for the Eurozone itself?

“Summit fatigue” is a real issue in long-running sagas like Greece.  It can easily lead people to sleepwalk into a situation they had never dreamed could happen.

In this case, the risk is very clear and immediate.  It is that large numbers of migrants start to pour into N Europe via the relatively safe route from Turkey to Greece.  (The United Nations estimates there are now 4 million Syrian refugees, and report that total migrant crossings rose 80% in H1 versus 2015 to 137k).  And in turn, their arrival leads within a short while to the triumph of nationalist parties in France, the Netherlands and elsewhere, all determined to exit not just the Eurozone but the European Union itself.

Sunday will be a critical day for all of us who live in Europe.  And for the underlying stability of the political structures that have underpinned the world since World War 2.

 

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