If all that was needed for the eurozone to stabilise was the departure of the Greeks, then it would have happened by now. Indeed, successive Greek sovereign debt crises have offered every opportunity, not to say incentive, for the Germans – paymasters and dominant voice in the eurozone – to push Athens out. Instead, with an admirable commitment to European unity, the German taxpayer has, albeit grumpily, paid up and subsidised Greece and Club Med’s other uncompetitive economies – Cyprus, Portugal, Spain and Italy.
Yet the suspicion is that German idealism and generosity is not matched by Greek determination and self-sacrifice. More than suspicion, in fact: the Greek Syriza party may well triumph in the election later this month. It is threatening to renege on the deal Greece reached with the IMF, EU and European Central Bank because it is too austere, even though it’s almost completed. Such an outcome would not be good for Greece, which would gain an even worse reputation for its ability to hold to international obligations, and her exit from the eurozone would soon follow. A re-introduced drachma would immediately devalue, and the real-terms value of her euro-denominated debt would rise even further beyond redemption. Default would then be the only option. No one would lend to them. The Greek people would suffer more grievously than now.
Such a turn of events would also be disastrous for the eurozone as a whole, at least in the short term, because of “contagion”. This little-understood phenomenon demonstrated its destructive potential during both the banking crisis and successive eurozone crises. Panic, often irrationally, spreads from bank to bank, from bank to country, and from country to country, and something of the same is happening now, with the euro falling to fresh lows in inverse relation to Syriza’s poll rating.
Added to the unpredictable consequences of oil dipping below $50 a barrel, it is alarming financial markets. Deflation is looming, something not seen in Europe since before the Second World War but which has mired Japan in stagnation for two decades. After Greece, the dominos would fall – Portugal, Spain and the rest. The rout may not end until it has overcome France, in which case the euro would simply be a proxy German currency, with only the Netherlands, Luxembourg and Finland as economic satellites along for the ride. Europe would slide back into recession.
Despite the damage it would cause, many governments must be quietly wondering whether Greece’s exit from the eurozone is simply inevitable, as Greek resistance to reform proves insurmountable. When as committed a Europhile as President François Hollande remarks, gnomically, that “the Greeks are free to determine their own destiny”, you can feel the patience of the leaders of the eurozone wearing thin.
Contingency plans must be being made now, as they must surely have been formulated during past ructions. Huge sums would have to be made available to the likes of Portugal and Spain, with the G20 and IMF standing by the ECB; the practicalities of reintroducing a new drachma would need to be rapidly sorted out; demonetisation of Greek-design euro coins and euro banknotes printed there would be a purely symbolic but powerful act; unprecedented printing of money by the ECB itself to reflate Europe’s floundering economy would have to follow; Greece would still need financial aid.
A Grexit and its knock-on effects would be as dramatic as anything we have experienced since 2007. It would hit European growth, and with it the chances of a continuing British recovery. George Osborne said last year that a slowdown in the eurozone was the biggest threat to UK prospects, and so it remains. Greece is a global problem, no matter what Syriza might think.
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