Europe’s Stark Choice - Reform or Collapse

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Europe’s fiscal compact is unfit for purpose. The Greek rebellion will either force its redesign, or cause the entire project to collapse

Greece has been a thorn in the side of the Eurozone for a very long time. Right from the start, other member states were dubious about its fiscal responsibility and commitment to EU rules: something never quite added up. But once it admitted that it had lied about the true state of its finances in order to gain admittance to the Euro, the gloves came off.  Other Euro member states, angry that Greece had put at risk the financial stability of the whole bloc and scared of being on the hook for its debts, wanted to force it out of the Euro—brutally. Tim Geithner recalls in his memoirs that the Eurozone leadership wanted to ‘get out the [baseball] bats’.

Fortunately cooler heads prevailed, and Greece was allowed to remain in the Euro on condition that it complied with the fiscal rules set by the Troika—the European Commission, ECB and IMF—on behalf of Greece’s creditors. Its debts were restructured in 2012: private sector investors took large losses, but the official sector, nothing. Now, nearly all of Greece’s debt is owned by other European states and their banks, the ECB and the IMF. Any further debt restructuring would require some or all of these august bodies to accept losses.

Three years on, and we appear to be replaying the same scene. But this time, Greece is playing hardball. It has refused to comply with the terms and conditions of its previous bailout and is arguing for further debt restructuring and a new approach to restoring growth. The creditor nations are furious. The fact that Greece has now been in deep recession for over 5 years and shows little sign of recovery matters little to them. They say that since the Eurozone has been seriously threatened by breaches of rules and obligations by member states, its future cohesion now depends on everyone abiding by their agreements.

Creditor nations have a point. A union is only as strong as its weakest member, and Greece is definitely the weakest link. Other Eurozone countries may be poorer, but only Greece defies the authority of the European Commission and the ECB. Only Greece refuses to comply with fiscal rules designed to ensure that other countries are not forced to bear responsibility for its spending decisions. Only Greece risks being pushed out of the Euro, at who knows what cost not only to its own economy but to the financial stability of Europe. True, the banking systems of other states are less exposed to Greece than they were in 2010. But a Greek exit would mean losses for the ECB and other Eurozone governments, and the possibility of destabilising outflows of capital from other distressed periphery countries.  

So is Greece made of sterner stuff than the other member states, or are its expectations simply unrealistic? Are other member states that are complying with the terms of their bailout programmes even at the cost of depression and high unemployment wimps, or do they have a stronger commitment to the aims of the European Union? To what extent can Euro members really determine their own fiscal policy?

Read the rest of Frances Coppola’s analysis on New Left Project.