I have been predicting a Greek exit from the euro for a while now. I have also noted that other countries with much better credit rating, primarily Finland, have been floating the idea of leaving the euro because they don’t want to be contaminated by the Greek mess. This has, as I have explained, put a lot of tension on the euro, and essentially forced pro-euro nations like Germany to choose whether or not they want to be part of a weak currency, or a strong one.
It looks like the Germans have now made up their minds. According to the EU Observer the Germans have already begun engineering the Greek secession from the common currency:
Greek prime minister Antonis Samaras has called on EU politicians to stop unhelpful speculation about his country’s exit from the eurozone but his plea comes as it emerged that German officials have set up a ‘Grexit’ working group.
Not surprisingly, this does not sit well with the Greek prime minister, who says that…
efforts to undertake the tough reforms demanded by Greece’s lenders are being undermined by regular negative statements about Athens’ euro future. “How can we privatise when, every day, European officials speculate publicly about a potential exit of Greece from the common currency? This has got to stop.” Samaras said an exit from the eurozone would be “devastating” for Greece as no democracy could survive such a drop in living standards but also for other eurozone countries who would feel sharp knock-on effects.
Well, to begin with the Greeks have not exactly been working to build their own standard of living. Their idea of “standard of living” has been to milk as much as they could out of government and then use a German-backed credit card called the common currency to get cheap loans for their lavish fiscal self-indulgence. Mr. Samaras is not the right person to lament about a drop in the standard of living.
Beyond that, he does have a point in that the speculations about a Greek exit contradict his efforts at putting austerity to work in his country. From an outsider’s viewpoint this looks like the EU and Germany don’t believe in their own deal to save Greece. But this contradiction is problematic only to the extent that one believes that the austerity imposed by the EU actually could save Greece. It can’t. In fact, the austerity measures are pushing Greece closer and closer to a breaking point where the country will ditch both the euro and its parliamentary democracy.
Therefore, Mr. Samaras’ complaints, while valid within a narrow context, are more reflective of his overall frustration of where his country is going than part of a genuine effort to save Greece. If he really wanted to save Greece he should end the austerity bombardment of the country’s economy and focus on structural reforms that will permanently roll back the welfare state.
As the EU Observer notes, Samaras is in Berlin to negotiate easier terms on the austerity programs demanded by the EU and Germany, but his reason for doing so has nothing to do with getting time to reform away tax-funded entitlement programs. His only goal is to avoid uncontrollable escalation of an already tense political and social situation in Greece:
Samaras will meet Chancellor Angela Merkel in Berlin Friday (24 August) to put the case for more flexibility around the austerity programme demanded by creditors in return for the second €130bn bailout. He said the meeting would not be about discussing the goals of the programme but how to achieve them while maintaining “social cohesion.” However his visit coincides with news that the German finance ministry has established a special working group to discuss how to deal with a potential Greek exit from the eurozone. Financial Times Deutschland revealed that the group … is considering the “financial consequences” of an exit and how to prevent a “domino effect” to other states, the newspaper quotes a ministry official as saying.
The German government is strongly pro-euro, and its overall attitude is that Greece is an anomaly within an otherwise well working currency union. That is not the case: once Greece goes, it will be proof that the efforts to stabilize fiscally troubled countries within the euro zone do not work. Spain is currently undergoing the same treatment as Greece, though at an earlier stage. If Greece secedes, it will ony be a matter of time before a Spanish exit becomes reality.
What makes this situation so delicate is that the only way to save the euro is to kick out countries like Greece and Spain. But if that becomes the norm, it will set an entirely new and very low tolerance level toward fiscal problems in the remaining euro countries. It will reinforce the calls for a common fiscal union for the euro countries – a federal government running the entire welfare state in all nations with the euro as their currency. This new level of “integration” does not sit well with EU critics and those who want to preserve national sovereignty in Europe. It should therefore come as no surprise that a new, anti-euro movement has seen the light of day in Austria. EurActiv reports:
Billionaire auto parts magnate Frank Stronach has burst into Austrian politics with a call to abandon the euro, probably turning parliamentary elections due next year into a de-facto referendum on the country’s role in Europe. The man who emigrated to Canada as a 22-year-old pauper and made a fortune by building the Magna automotive supply empire has come home with a bang, insisting it is time to restore the schilling national currency as quickly as possible. Stronach’s party is so new that it still has no name and its support remains so far in single figures, but the 79-year-old is already drawing on the discontent about the cost of eurozone membership which is spreading in the bloc’s wealthier members.
Which again should not surprise anyone. The Finns have, as mentioned, already voiced the possibility of them returning to their national currency, the markka, if the euro continues to weaken from the perpetual problem countries down south. Austria is also a well-managed country, by European comparison, and, like Finland, a relative newcomer in the EU (the two joined in the mid-’90s together with Sweden). Being a strong economy, Austria finds itself…
having to fund bailouts for the eurozone’s weaker members. There is increasing evidence of bailout fatigue in the well-off countries, so having solidly pro-Europe Austria waver in its commitment would be an ominous sign for the currency. Finland’s foreign minister said last week that officials had prepared for the possible collapse of the single currency. Dutch voters go to the polls next month in an election dominated by the eurozone debt crisis and austerity measures. “Clearly this is not just an Austrian development but more representative of the so-called stronger countries which have the highest credit rating,” said Zsolt Darvas, research fellow at the Brussels-based Brugel think tank. “In Germany, Finland or the Netherlands you see exactly the same or similar movements.”
Interestingly, EurActiv reports that the concept of a euro rollback has set roots in national politics:
[Austrian] FPÖ leader Heinz-Christian Strache, whose party is off highs but still gets around 21% in polls, is calling for the eurozone to be reduced to a group of strong members such as Germany, Austria and the Netherlands. Even ÖVP leader and Foreign Minister Michael Spindelegger, a pro-Europe stalwart, has backed treaty changes to let the eurozone evict members that do not live up to financial commitments.
Whenever the Greek exit from the euro happens, it is going to be a tumultuous moment. It may turn out to be a bit of a fiscal blessing for the rest of Europe who can experience some easing of austerity policies – which they should use to start phasing out their welfare states, not rebuild them – but the problems in Greece will not go away. Their return to the drachma will in all likelihood cause a dramatic plunge of the currency, which in turn will lead to a serious spike in import-price inflation. The country will have scant opportunities to borrow on its own, which will force them to yet again choose between austerity, the welfare state – and ultimately the very democratic system of governance.
Other European countries are not that close to the abyss. Spain is experiencing political turmoil and some signs of social instability, though not yet at the level we can see in Greece. Nevertheless: the Greek experience is a stark warning to the rest of Europe: it’s time to wake up and do something about the welfare state – or else, you will follow in the Greek footsteps.