Cause and Effect in European Politics and Law

Will Greece cause a domino effect?

euinside, January 25, 2010

The management of the Greek economic crisis raises some disturbing parallels with the aftermath of the Peloponnesian war, writes in an analysis for the Financial Times the economic issues columnist of the daily Wolfgang Münchau. The war ended in 404BC, when the victorious Spartans imposed on Athens the rule of the Thirty Tyrants, who deprived the Athenians of most of their civil and democratic rights. The tyranny ended in a revolt after one year, when democracy was restored. A few decades later, the proud city states of Greece and Sparta were off the geopolitical map, the author writes.

He fears that such a scenario could develop in the euro area if the eurozone were to impose austerity from the outside, as a quid pro quo for a possible bail-out. The Greek crisis goes back a long time. The country entered the eurozone in 2001 with the help of some creative accounting. These accounts suggested that the country met the various entry criteria for membership, when in fact it did not. Successive Greek governments, on the left and the right, have since misrepresented the country’s fiscal position. Till present days when Greece is at a default, threatens the eurozone stability and no one has any confidence in the statements of the Greek government.

Because of these reasons Wolfgang Münchau outlines 4 scenarios which might develop. The first one is default by Greece with a bail-out from the eurozone or the European Union, conditional on a strict austerity programme. In this case, the EU will have to send its own version of the Thirty Tyrants to Athens to sort things out. This is a scenario both Greece and the EU are desperate to avoid because, according to the economist, the indigenous population would no doubt regard this as a foreign orchestrated coup and a defiance of democratic will. George Papandreou, the Greek prime minister, warned late last year that there is a danger that Greece might lose its sovereignty.

Scenario two is a default without bail-out. The EU would refuse financial aid on the grounds that Greece failed to observe EU rules. In this case, the crisis is very likely to spread to Portugal, which is in a similar predicament. Eventually the financial markets might also question whether Spain can ever return to a sustainable path.

Scenario three is the one everyone in Brussels prays for: the EU would succeed, by means of gentle persuasion, to get the Greek government to do all that is necessary, all by itself. This would include severe cuts in social and healthcare expenditure, a hugely unpopular broadening of the tax base, cuts in public sector employment levels, public sector wage freezes, and labour reforms that allow real wages in the private sector to fall. This is a gruesome list, but this is probably what it will take for Greece to restore its competitive position, lost during its decade in the eurozone. When you are locked in a monetary union, this is how you adjust. There is no exchange rate to devalue any longer. the author recalls.

And the third opportunity is a fudge, something that can fool a sufficiently large number of people without resolving anything. Over the course of the years, the EU has developed some expertise in this particular area. Under such an option, the Greek government could produce a package with respectable headline numbers, or make misleading promises about structural reforms. Nemesis is postponed, for now or at least for the current generation of politicians.

Regretfully, Wolfgang Münchau implies probability for the fourth scenario because it is politically most tempting, as it avoids the considerable risks inherent in the other scenarios. But it is the riskiest in the long run, because it invariably brings Greece a step closer to the point of no return, where there can be no recovery no matter what it does. And one more thing which is very important and is said by the author - scenario four is the one that pushes a weakly- governed monetary union, such as the eurozone, nearer breaking point.

The Euro Area
Angela Merkel, Emmanuel Macron | © Council of the EUAngela Merkel, Emmanuel Macron | © Council of the EU
From Deauville to Meseberg or How Euro Area Reform Is Evolving*
Benoit Coeure | © Council of the EUBenoit Coeure | © Council of the EU
Bulgaria Entered a Schengen Mode for the Eurozone Too
Pierre Moscovici | © Council of the EUPierre Moscovici | © Council of the EU
Normalisation of Growth in the Euro Area or Dark Clouds?