The Eurozone has weathered the storm before, but this time the tide is turning.
by David Ferreira
11 February 2015
Over five years the Euro crisis has performed the role of the boy who cried wolf to perfection. Europe has mastered anti-climax, causing global stock market sell-offs and rallying intense media attention only for late night meetings of European leaders to announce they have averted another economic catastrophe. With another meeting of EU finance ministers today, complacency is certainly understandable, but this time I think it’s genuinely different; the wolves have gathered and are ready for the kill.
To see why it’s different this time, we have to recall that those European summits didn’t resolve ‘the crisis’. They tackled immediate crises, like bailing out Greece or creating a bailout fund that Ireland and Portugal would turn to. Or indeed a second Greek bailout crisis, which would only buy a few months before another periphery country would experience a boycott from bond investors concerned about the viability of the monetary union. The limits of European governments to respond to these repeated crises were exposed when Italy and Spain fell under the market scrutiny that forced previous countries into bailout agreements. Pressure mounted from markets and the international community for the continent to find a definitive solution to the crisis, but still European leaders failed to agree to proposed solutions like eurobonds and deepening European integration.
So if European governments failed to agree to a lasting solution in 2012, how did the Eurozone survive until today? The European Central Bank’s (ECB) assurance to intervene and buy government bonds of troubled member states put an end to the repeated sell-offs on the bond market. The ECB’s chairman Mario Draghi stated explicitly in the summer of 2012 that the bank will do “whatever it takes to preserve the euro.” The market calm has lasted ever since. A bank that can ‘print money’ insisting it will buy on an unlimited basis in order to maintain the value of government bonds does wonders for price stability. Draghi’s comments were so effective that Spain endured an outlawed independence referendum in economically-vital Catalonia without the slightest bit of concern from the Spanish bond market.
Following the seasonal crises from 2010 to 2012, Europe’s politicians declared victory and meaningful discussion of fiscal union and eurobonds was unceremoniously abandoned. The combination of a stronger central bank and budget discipline outlined in the European Fiscal Compact treaty would have to be enough for Europe. Of course, it wasn’t and never will be. The combination of the ECB and budget discipline didn’t end the crisis, it only displaced it from the bond markets to the ballot boxes. The calm lasted so long as the elections didn’t take place, and explains why there’s so much concern over the possibility of snap elections – something entirely normal to parliamentary democracies. Instead of markets boycotting government bonds, it’s voters boycotting the political parties who’ve crafted the continent’s response to the crises of 2010 through 2012.
This is why I’m deeply sceptical that there’s some inevitable middle ground to be reached by the new Syriza government and its creditors. The German-led creditor bloc has spent years crafting a framework of ‘solidarity’ (loans) in exchange for budget tightening. Short of securing a meaningful debt restructuring, Greece will need lending from its European creditors to cover previous loans, but the conditions the EU and IMF would want to see are just not viable in the parliament elected by Greek voters last month.
The campaign to demonize Syriza for its defiance is already well underway, yet all Syriza has done is resumed the debate where it was left in 2012 before the central bank intervened. Europe has to become something more than just a fortress surrounding a monetary union and free trade area. This is exactly the mainstream argument behind calls years ago for fiscal union and eurobonds, yet today is denounced as Chavismo or a Putin-conceived plot to dismantle Europe. This is about fatal flaws in the structure of Europe that Syriza is now pointing out. By contrast, Europe’s leaders have confused the truce won in 2012 for a lasting peace and now see the new Greek government as an unprovoked aggressor.
The danger is that this stand-off in Greece is a premature skirmish in which Syriza is outmatched, with short-term domestic politics driving current Portuguese and Spanish governments to close ranks with the ‘creditor bloc’. Meanwhile France and Italy have no appetite to initiate the definitive confrontation with Germany and its allies over the long-term structure of the European project.
Should Syriza remain defiant in total isolation, it risks governing Greece through a traumatic forced exit from the Eurozone. Even if the Eurozone survives such a traumatic expulsion intact, social democrats, greens and democratic socialists across the continent will have witnessed the lengths Europe’s leaders will go to prevent the implementation of the left’s political programme. The European project stands no chance of survival if it’s outflanked by eurosceptic forces on both the left and right.