x Abu Dhabi, UAESunday 23 July 2017

Six reasons why Greece's woes are the world's agony

The world can learn a lot from Greece's financial agony.

What are the lessons of Greece's agony? To an outsider, the threatened collapse of the European currency might seem to be just a problem for the old continent and its dithering leaders. But in fact, there are many lessons - some of them not pleasant - for the rest of the world. Here are six:

First, the lack of US leadership in this crisis is a sign of the times. In the past the US would have led the rescue of the euro zone, a top-priority region for Washington, and put its hand in its pocket. These days the US has no cash to spare. If the US president, Barack Obama, asked Congress for money, he would be unlikely to get it. And if he did somehow find the funds, such largesse would not help him get re-elected, which is his main concern at the moment.

Thus Mr Obama will be a passenger at the summit of the G20 countries in Cannes, France, that continues today. With the euro zone countries running cap-in-hand to China to ask for bailout money, we are seeing the grand premiere of the multipolar world, where a diminished US no longer holds the ring.

Second, bigger does not always mean stronger. As the European Union has expanded from six members to 27, it has gained in size but lost in cohesion. What was once a tight group of like-minded countries bound together by memories of the Second World War now seems as fractious as a mini United Nations. The 17 euro zone countries - the subgroup of EU states that have chosen to adopt the European common currency - are divided by differences in political culture between north and south.

In brutal caricature, this means that the hard-working ants of the north resent subsidising the sun-loving grasshoppers of the south.

At the time of greatest need for leadership, the traditional Franco-German alliance is fractured. Nicolas Sarkozy and Angela Merkel do not get on personally, or show much respect for the other politically. Whereas past leaders of France and Germany were Europeans down to the soles of their boots, Mrs Merkel is not convinced of Germany's need to pick up the bill for the rest of the EU. The hyperactive Mr Sarkozy, trailing in the polls ahead of elections next year, seems to be in permanent campaign mode.

Third, the more crisis summits you hold, the less they mean. There have been 23 summits by the EU or the euro zone countries since April of last year. With each one, the solutions offered by the leaders have fallen further behind the expectations of the markets. If tackled resolutely at the start of the crisis, Greece's problems could have been contained using only EU funds.

But the problem has grown so large that now it threatens the viability of the euro and is beyond the capacity of euro zone countries to control. Incoherent half-measures will never cow the financial markets. Only the boldest steps - sometimes appearing recklessly bold when they are announced - will succeed.

Fourth, the unthinkable usually happens unless you stop it. For months European leaders have repeated the mantra that Greece cannot be allowed to default on its debts, or to drop out of the euro zone. Yet at midnight on Wednesday Mrs Merkel admitted that the unthinkable was upon us. She declared that the issue was now whether Greece was going to stay in the euro zone or be kicked out to deal alone with its intolerable debt burden.

The key issue was not Greece, but insulating the rest of the euro zone countries from the Greek contagion. There was an element of grandstanding in this statement, but it brings the EU leaders into line with what everyone else has been thinking. Defaults are a fact of life in banking, and the euro could no doubt survive Greece defaulting.

That is easily said, but a sovereign default would actually be hell for the Greeks. Greek banks would collapse as every euro deposit was withdrawn. A revived drachma would be weak, and subject to hyperinflation. Living standards would plummet and savings would be wiped out. But countries survive: Russia defaulted in 1998 and Argentina in 2002.

Fifth, economic reality will test to destruction any grand political idea. Communism in Russia survived famine and German invasion, but it was destroyed by poor economic performance relative to the West in the 1980s.

The European grand political idea of unifying the continent is undermined by the fact that it does not mesh with economic reality. The reality in this case is that a relatively poor country like Greece, with little in its economy that is globally competitive, engaged in a borrowing binge at low eurozone interest rates. The European leadership did not want to know that both the major Greek political parties were padding the public payroll with their supporters and failing to collect much in the way of taxes.

Sixth, liberal democracy is addicted to debt. When Europe grew rich on its old colonies and the US enjoyed global industrial dominance after the Second World War, it was easy for politicians to promise their electorates a higher standard of living every year. With globalisation, jobs are harder to come by, and the economies of advanced countries are not producing the profits needed to raise living standards.

With every election, governments offer the voters improved health and welfare. Only debt can meet the shortfall in the public purse. In recent years the banks have stepped forward with sophisticated financial products that have repackaged risky debts into tradable assets. That era is now over. The question remains, how can European-style democracy work in an age of retrenchment?

Clearly, the European elites have fallen out of touch with the people. For Europe, the lesson must be that those who have become distanced from the people must govern with popular consent, unaided by the drug of debt.

The European project must either be imposed - which may not be acceptable in Europe - or it must gain popular support. The European project probably does this in fact, but fewer voters now believe this, tending instead to think that big business and banks are the only winners.

 

aphilps@thenational.ae