Greece and the Eurozone head for showdown over debt issue

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Greece Feb15

We all learnt one crucial lesson from Syriza’s victory in the Greek election last week – voters can halt the European Central Bank (ECB).  Or in other words, protest coalitions can trump elite consensus.  In places like Spain and France, this effect may not work through immediately, but it is being absorbed.

Thus Greece and the Eurozone crisis are back in the news, again.  And in reality, they have never gone away, as I noted last May at the time of the European elections:

  • Investors believe that Germany will be happy to pick up the bills for the problems in the PIIGS
  • This, of course, is wishful thinking – Germany will not, and cannot, afford the cost involved
  • Thus in reality the potential break-up of the Eurozone has only been delayed by the ECB’s bluff, but not avoided

The Syriza party’s win in the Greek elections last month simply confirmed the obvious, that no country would put up with half its young people being unemployed forever.

So now we are coming back to the issue which has been hiding under the carpet all along, and has never gone away.

This dates back to the very start of the process towards monetary union 25 years ago.  That was when then German Chancellor Kohl and French President Mitterrand agreed that monetary union had to be accompanied by political union.

They jointly proposed an inter-governmental conference that would “ensure unity and coherence of the union’s economic, monetary and political action“.  But unsurprisingly, this political union never happened, for the simple reason that France did not want to give up its national sovereignty.

But you can’t be half-pregnant.  And the issue has therefore refused to go away.  At heart, in the case of Greece’s debt this means:

  • Either the Germans have to support the Greeks financially, and the Greeks have to play by the agreed rules
  • Or, both countries are free to what they want to do as separate nation states

Put like this, it is obvious why the issue was never resolved.

What is also becoming clear is that developments since Greece’s first default in 2012 have made the problem worse not better.  They have confirmed my worst fears then, that it marked only “the end of the beginning of the Crisis“.  Today, it has instead now become a fault-line on the North-South political divide within Europe:

  • For many Northerners, it is a morality play as well as an economic and political issue.  This is particularly true in Germany, where the word for debt, Schuld, also means guilt
  • While for Greeks, and many Southerners it is an existential crisis of “can’t pay, won’t pay”.  There is no ‘business as usual” scenario possible for the new Syriza government 

In the meantime, as Reuters has noted, the real beneficiaries of the crisis are the other populist parties on the right and left of the political spectrum.  If agreement cannot be reached in the next few weeks, then a broader upheaval in Europe’s political landscape becomes more and more likely.

This is why the Eurozone debt crisis features so prominently in my ‘Ring of Fire’.  Greece is now another earthquake waiting to happen.

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