November seems to be a particularly bad time for Greece, which seems perpetually to lurch back and forth between a state of crisis and extreme crisis.
In November last year it was widely believed that Greece would default on its massive debt and that this would precipitate an unmanageable euro-wide crisis that would lead to the breakup of the euro.
Twelve months later, Greece is still clinging to the precipice. This week the country is battling to avoid defaulting on a E5 billion (R55.4bn) debt repayment and its news coverage continues to be dominated by scenes of violent battles between police and increasingly angry protesters.
But this time around it seems that Euroland has succeeded in ring-fencing the Greek crisis. It is not that Greece is no longer expected to default – many believe that and its exit from the euro is inevitable – it’s that Greece will not destroy the euro.
At last year’s Kilkenomics economics and comedy festival, held in a town in the Irish midlands, a panel of international economists and financial analysts, led by Jeffrey Sachs who had just attended the Group of 20 (G20) summit in Cannes, seemed quite certain that the euro was on the point of a breakup. The summit, which by Sachs’ description seemed dominated by petty politicking among EU officials, was overshadowed by then Greek prime minister George Papandreou’s dramatic decision to call for a referendum on the Greek bailout.
Papandreou’s move revived fears that the country was set to default on its debts in a disorganised way that would lead to defaults by other EU member states and force a breakup of the euro.
The panel of economists and financial analysts at this year’s Kilkenomics festival was more optimistic about the euro’s short to medium-term outlook. The euro was expected to survive for at least another three years and possibly as many as 15 years.
The improved outlook for the euro was despite the fact that other than last November’s appointment of Mario Draghi to replace Jean-Claude Trichet as president of the European Central Bank (ECB) , there has been no significant change to the crisis-ridden conditions that prevail.
Presumably politicians, bureaucrats and markets find some comfort in the familiarity that comes with constant crisis conditions.
Paul McCulley, an economist and former managing director of Pimco, which is one of the largest bond investors in the world with assets under management currently of about $1.8 trillion (R15.7 trillion), said that the major problem with the euro zone was that politicians and bureaucrats “are willing to do enough to stop it from breaking up but not enough to make the region prosper”.
Bill Black, a professor of economics and law and a former bank regulator in the US, said: “Ireland, Spain and Greece are being kept on life support by the EU” but are being deprived of what they need to grow.
Black said that an economy needed to be able to do three things to deal with recessionary conditions: devalue its currency, implement an aggressive fiscal policy, and implement an aggressive monetary policy. “As part of the euro, Ireland can’t do any of this and it has zero influence on the ECB,” said Black.
He described the current ECB policy as “the European version of the Washington consensus”, which had been responsible for an increase in both left and right-wing radicalism in South America during the 1980s and 1990s.
Regarding the issue of Ireland defaulting, Black said: “Right now all your choices are bad ones, whatever you do, bad things will happen but worse will happen if you don’t do anything, there is no easy way out.”
The seeming lack of concern about the ongoing crisis in Greece and the prospect of its defaulting and crashing out of the euro was attributed to the view that the major euro states, and in particular Germany, had been able to dilute its exposure to Greek debt.
“Italy, Spain and perhaps France are now of more concern than Greece,” said Black.
While the German and French banks may have acquired a certain immunity to the Greek crisis some of this appears to have been achieved by increasing their indirect exposure to the country’s debt.
Draghi’s role in extending the likely lifespan of the euro is down to the fact that this former governor of the Bank of Italy “is turning the euro into something like the lira [the previous Italian currency] without the Germans noticing”, said Black, referring to Draghi’s efforts to rescue Euroland by releasing some money into the euro economy.
“But to be successful, he will have to do it on the same scale as the US government, Japan and the Bank of England did, they pumped money into the system. However, if everyone knows that the ECB is going to fund budget deficits it would mean that the ECB is running Europe and that might not be politically sustainable,” said Black.
Constantin Gurdgiev, a professor of finance at Trinity College Dublin, said that as the political union necessary to sustain the euro was “not an option”, member states would inevitably have to consider how it could be broken up and how to deal with the “huge amounts of pain” such a breakup would cause.
“Ireland should be looking at a parallel remonetisation of its economy and should be introducing its own currency for certain transactions,” said Gurdgiev.
While there may be sound financial and economic reasons why the euro should be dismantled, the reality is that the longer it survives, the more difficult it will be to dismantle, particularly when powerful vested interests support its survival.