x Abu Dhabi, UAEFriday 28 July 2017

Greek crisis is the beginning of the end for this euro zone

The Bank of England's Sir Mervyn King isn't the only one preparing for Greece's withdrawal from the single European currency.

Sir Mervyn King, governor of the Bank of England, is not the most popular man in Germany these days. In a world where bankers are supposed to think seven times before making a market-moving pronouncement, he blurted out some unpleasant truths. Europe was "tearing itself apart", he said, and Britain had to prepare for Greece to exit from the euro zone, the 17 countries which use the European single currency.

Such views are held privately all over the European Union, but the official line is rather different: the euro zone is going to hold together, and Greece will not be forced into reviving the old drachma, with all the devastating consequences that would entail for the whole European financial system.

There have, of course, been dark warnings of the humiliation that would follow if Greece chose to abandon the euro and default on its debts. But these are all part of the EU's Plan A - which is to scare the Greeks into voting on June 17 for more "responsible" parties than the ones they chose in this month's inconclusive election. A return to sanity, in the Brussels view, would allow the formation of a government to implement the austerity plan imposed by the "troika" - the European Commission, the European Central Bank and the International Monetary Fund - that determines the fate of Greece.

Plan A involves a strategy that has worked before in recalcitrant states such as Ireland to make European electorates change their mind after they have voted the wrong way. The idea is to turn next month's election into a referendum on whether Greece stays in the euro zone. One of the many contradictions of democracy is that the Greeks are 80 per cent in favour of keeping the euro, but vote overwhelmingly for parties that refuse to pay the price required to do so.

On the surface, the respect for the democratic timetable is admirable. But there is hidden reason. If Greece is going to abandon the euro, the Europeans will need a massive fighting fund - known as a "firewall" - to protect Spain from the Greek contagion. This is not yet fully subscribed, so that extra month is needed as a breathing space.

For all the confident talk, time is running out for Plan A. The Greeks are withdrawing their euros from the banks, preferring to keep them under the mattress rather than have them one day forcibly converted into depreciating drachmas. Who would not do the same?

Opinion polls show that the radical left anti-austerity parties are gaining in popularity. The two mainstream parties, the centre-right New Democracy and socialist PASOK, have lost credibility, having spent the past two decades piling up state debt to buy votes.

To put these discredited parties back in power would be widely seen as a great humiliation, with the added shame of giving in to what is seen as a German diktat.

It will take a miracle for Plan A to work. Already European minds are looking ahead to what the EU might look like in the future after the exit of Greece from the euro zone. Opinion is divided between those who fear that the Greek crisis will cause a financial cataclysm, and those who see it as the only path for Greece to escape a mountain of unpayable debt and rebuild its economy, just as Thailand, Indonesia and South Korea did with spectacular success after the 1997 Asian financial crisis.

One thing is clear. The era of the EU being driven by an ideology of wishful thinking is over. One should not be too dismissive: by the standards of other grand schemes, it has been a great success. But its future will not be like its past. The lesson of this euro zone crisis is that the member states - even small ones like Greece - still have the capacity to inflict terrible harm on the whole. The wealthier nations will inevitably be more choosy about who they invite into the club.

John Jungclaussen, London correspondent of Die Zeit, a German weekly, has an intriguing view of the future. In the short term, euro-zone members will have to move towards greater federalism, with strict control of member states' borrowing and budget deficits. But over the next generation, the euro zone will shrink to the northern European countries that favour solid money - Germany, the Benelux and Nordic countries, Poland and perhaps even Britain. This grouping will look very like the Hanseatic League, a trading group of city states along the coast of the North Sea and the Baltic that flourished from the 13th to the 16th centuries.

The surprising absence from this list is France. Hitherto the Franco-German axis has been the motor for European integration. But perhaps France is losing the will to keep up with Germany. Once the memory of the recurrent wars between the two neighbours - the original driver for European integration - becomes fuzzy, they may go separate ways.

And what of Greece? A clue to its future lies in Cyprus, which stands to suffer a major financial shock because of the close link between Cypriot and Greek banks. Cyprus is a favourite place for the deposits of Russian billionaires, and Moscow last year provided a €2.5 billion (Dh11.7 billion) loan to help out the island state.

This is not a solitary gesture. Russia's state-owned Sberbank is offering to step in with a massive loan for Ukraine, whose president, Victor Yanukovych, has fallen out with the EU and the International Monetary Fund. Clearly the way would be open for Russia also to be patron of the Greeks as they flee the German straitjacket.

But one Russian commentator, Konstantin Eggert, says Moscow, flush with oil revenues, is rubbing its hands at the prospect of "buying influence, assets and politicians" on the "non-transparent, corrupt fringes of the Old World". We are a long way from there, but that is maybe what Plan B looks like.

 

aphilps@thenational.ae

On Twitter: @aphilps