Grexit: The Footsteps Grow Louder … Could the EU Blow Apart?
By Staff News & Analysis - February 02, 2015

Europe's creditors play with 'political fire' in pushing Greece to the brink. "The creation of the euro was a terrible mistake but breaking it up would be an even bigger mistake. Anything could happen," warns former IMF bail-out chief … The North European power structure has issued stern and inflexible warnings to Greece. Syriza's triumphant radicals must pay the country's debts and stick to the letter of the hated `Memorandum' imposed by creditors. If premier Alexis Tsipras breaches the terms of Greece's EU-IMF Troika bail-out – signed by earlier leaders under duress, and deemed unjust in Athens – Europe will cut off €54bn of support for the Greek banking system and force the country out of the euro in short order. Europe must not yield to "blackmail," said Germany's ZEW institute. – UK Telegraph

Dominant Social Theme: It will all work out for Greece and the EU and austerity will lead the way.

Free-Market Analysis: There are no easy answers here now that the Greek Syriza government has been elected and made it clear (at least so far) that it will not continue down the road that Greece is supposedly – lawfully – bound to travel.

A previous administration signed on to a package of austerity measures under considerable duress and now Germany in particular is demanding that Greece follow the "rules of the game." This includes considerable, continued government parsimony, higher taxes and reduced public sector benefits throughout Greek society.

To be fair to Germany, Chancellor Angela Merkel has her own difficult game to play. German citizens were suspicious of the euro to begin with and there is language in the EU Constitution forbidding the kind of money printing that the European Central Bank is now embarking upon.

Having acquiesced for now to an illegal European stimulus that is costing the average German money, Merkel can hardly afford to be seen as acting in a sympathetic manner when it comes to Greek austerity. She has to draw the proverbial line.

And indeed lines, for now, are drawn. Here's more:

Wolfgang Schäuble, Germany's finance minister, said the new Syriza government is bound by the contractual terms of Greece's €245bn loan package from the Troika. "Elections change nothing. There are rules. We did whatever could be done to support Greece in difficult times, again and again," he said.

When the crisis first erupted in 2010, and re-erupted in 2012, Europe lacked a firewall. The conflagration threatened to spread instantly from Greece to Portugal, Ireland, and beyond.

This time Mr Schäuble thinks they are ready. "We face no risk of contagion, so nobody should think we can be put under pressure easily. We are relaxed," he said.

In Frankfurt, the Bundesbank's Joachim Nagel warned that there will be "fatal consequences" if Greece violates the terms of the rescue deal.

His words were echoed by the European Central Bank's Benoît Cœuré, ubiquitous on the airways with hot admonitions. "Mr Tsipras must pay, those are the rules of the game, there is no room for unilateral behaviour in Europe," he said.

The riposte from Athens has been tart. Greece will not have any further dealings with the Troika and will not ask for an extension of its bail-out at the end of February. "We will not accept the self-reinforcing crisis of deflation and debt," said the new finance minister, Yanis Varoufakis.

"Syriza has just won a landslide popular mandate from the Greek people to tell the Troika to go to Hell. It is ludicrous to shout at them and tell them they can't wriggle out of agreements," said Giles Merritt, head of the Brussels think-tank Friends of Europe.

We can see from the above that the crisis has hardened respective positions, or at least that seems to be the case.

Now, it could be that much of this is posturing and that ultimately, Syriza intends to settle with the EU. But given Syriza's rhetoric, it is difficult to see Syriza walking away from negotiations without achieving something significant.

So will Merkel give in to Syriza? Given that she seems willing to tolerate the ECB's new stimulus, Merkel is not well placed for further concessions.

Mr Merritt said the Syriza revolt has exposed the political failure of EMU crisis strategy with refreshing clarity. "People in Brussels are losing patience with Germany. The real issue at hand is how we are going to rescue the eurozone from economic depression caused by five years of misguided austerity. Tspiras may find that he has more friends in this city than he thinks," he said.

"We cannot possibly risk Grexit at this stage and trigger a fresh eurozone crisis, so the Commission will soon waiver. Jyrki Katainen is toeing the line for now but he is not a fool. It is Greece that really has the whip hand, and the task is to find a face-saving formula for Germany," he said.

The trouble with "wavering" is that Greece is not the only country with a political party that wants to reverse Brussels austerity. Portugal, Spain and even Italy all have similar movements. If Syriza is granted concessions, this will surely embolden other parties in other countries.

In turn could this generate a backlash in Germany? The article doesn't discuss this particular possibility but the ECB's quantitative easing is not popular in Germany nor in other Northern European countries. In fact, the ECB itself was not able to obtain the power it needed to pursue the program on its own.

… There has been no fundamental move to fiscal union. This month's compromise deal on QE means each national central bank will be responsible for 80pc of its own debt purchases, entrenching EMU fragmentation. The EU banking union belies its name. It is in fact a supervisory union. Leaders never delivered on their pledge to end the "vicious circle" in which bank crises and sovereign debt crises feed on each other.

The Syrizan victory has exacerbated the EU's polarization regarding the ongoing and nearly endless financial crisis faced by the eurozone in particular. Almost any solution seems to have negative consequences promising yet more destabilization.

We've been predicting this state of affairs for years. When the EU was handing out money and politicians and industry had few hard choices to make the Union seemed to be functioning well. But adversity has revealed the obvious fault lines.

The tribes of Europe, we have often pointed out, are not nearly so supine as they appeared to be during the EU's pre-2008 heyday. Hard times are bound to reveal age-old fault lines. Europe is not a young continent.

This is surely why officials in Brussels are so desperate to emphasize deflation and implement increased money printing policies. Currency debasement is the quickest way to reduce debt and to create a pretense of recovery.

But the currently contemplated QE program as constituted may not make a difference – assuming such a program in any form could make a difference – and the wrangling may go on in the near term without resolution. How much time, at this point, does the EU have?

The protracted Great Recession is putting pressure on countries and economies around the world. If Europe does blow apart – or at least the euro – the pressure could be considerably exacerbated.

The proverbial footsteps are certainly getting louder. A foundering euro could lead to a most serious monetary chain reaction. Currency markets might sink into chaos and defaults would certainly strain the trillion-dollar derivatives market.

After Thoughts

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