When Greece looked like it might be forced out of the Euro in late 2011, there was a collective intake of breath. A small country accounting for two percent of Europe’s GDP became a global preoccupation. A lot was at stake, in fact, the entire Euro project. Contingency plans were being prepared everywhere - the European Commission, the European Council, the IMF, the European Central Bank, across all European capitals - and further afield.
Officials in Brussels were probably looking forward to getting rid of the “infuriating Greeks” as this informative book explains. But while Greece, in isolation, could have been given massive support and had its held by the IMF while it reintroduced its own currency (the drachma), the main fear was contagion; in other words, that a ‘Grexit’ would be followed by what the authors term, ‘Portexit’, ‘Spexit’, ‘Italexit’ and even ‘Frexit’! What a mess it would have been indeed. And hugely costly too. Merkel, who had publicly proclaimed earlier that “if the Euro fails, Europe fails”, finally rejected that option and Greece was granted its second bailout in 2012.
With that decision came the most important change in the running of the single currency. In July 2012 the ECB became the de facto lender of last resort when its new head, Mario Draghi confirmed that he would be prepared, despite various objections from Germany’s constitutional court, to do “WHATEVER IT TAKES TO PRESERVE THE EURO”. His announcement alone, rather than any direct action, resulted in massively lowering yields across the board, as well as re-opening governments’ access to market borrowing and recently enabled Ireland and Portugal to exit their bail-out arrangements. Greek 10-year bond yields are now around 5-6 percent compared to over 35 percent at the height of the crisis.
The battle so far, the book argues, has been won but at too high a price. Slow growth/high unemployment Europe has lost its global economic and political power as the institutional framework for the Euro proved lacking.
It is being built up, bit by bit at present, not least in the banking sector. But in the process, the whole concept of European ‘economic governance’ is being thrown into question with the rise of anti-EU and anti- Euro parties, as well as concern about the loss of democratic legitimacy.
More fiscal federalism where risks are increasingly shared, and a greater role in decision making by national governments may be a way of squaring the circle. But Peet and La Guardia give us no guarantees that this will be enough to avert a next crisis. And I fear they may be right.