The eurozone remains united
The Greek issue has returned to the agenda for politicians and the media. Discussing it, Liang Haiming offers in his article “A Greek crisis could impact China’s market” a comprehensive analysis of critical economic questions. The idea of a “two speed” Europe or the launch of two different currencies has been explored since the outbreak of the debt crisis. Recently, the term, “flexible EU” was also introduced. Berlin and Paris seemed keen on proceeding after the UK referendum in June 2016.
We certainly live in a world of instability and the beginning of Donald Trump’s presidency makes it more uncertain. However, every analysis on the Greek and the European debt crisis should draw on the experience of the previous eight years. This said, it is politics and not economics, which has been the eurozone’s driving force. Specifically, lessons from the management of the crisis suggest that what has mattered more is the political interest of the eurozone’s survival, often at the expense of orthodox economic thinking. If this principle is about to be buried, then Liang’s argumentation will almost certainly be followed by practice.
There is no evidence or indication that, for the time being, the eurozone will risk losing all that it has made and achieved since 2010. There is no question that the Greek case is a unique one in the EU. The country has already received three bailouts and could need a fourth next year. Other problematic states, namely Cyprus, Ireland, Portugal and Spain, have implemented necessary reforms and managed to return to normalcy. Even under these circumstances eurozone members will find it hard to abandon a country for the rescue of which they have paid a lot and in support of which they have advocated in their national parliaments. The public opinion anger for the acknowledgement of failure cannot be ignored.
Some voices suggest that Greece should be sacrificed as a modern Iphigenia for the eurozone to survive and for it to return to growth. They principally focus on some economic models based on currency devaluation as well as on already decided preventive measures, which will maybe save the eurosystem after a potential Grexit. But this approach is risky for two main reasons. First, the problem of Greece is not its currency but the lack of structural reforms to make its economy competitive. These reforms can be better implemented with the country holding onto the euro and being under close supervision. And second, the “domino effect” might be stopped in theory but not necessarily in practice.
Germany, the economic locomotive of Europe, does not want to face a new Greek drama in view of the September federal election. More importantly, Chancellor Angela Merkel is facing significant political pressure by the new leader of the Social Democratic Party ( SPD) Martin Schulz. Schulz, former President of the European Parliament as well as Sigmar Gabriel, former SPD leader and current Foreign Minister, want Greece to stay in the eurozone and have publicly said so.
Does all this suggest that problems have been overcome and that Greece will soon return to normalcy? The answer is rather negative. The Greek government is meeting some of its bailout targets but this is happening due to taxes and cuts and not real reforms. As a result, the society is becoming exhausted and there is no light at the end of the tunnel to be seen. In parallel with this, the continuous disagreement between the EU and the IMF on measures to make the Greek debt sustainable might delay the return of Greece to international markets. The EU is not prepared to accept a drastic haircut and the IMF is pushing towards this direction but without itself losing any money as its regulations rule out a debt- restructuring of loans it provides.
But Greece will proceed that way within the eurozone. It can be called the “Greek rhythm” which is slower and more problematic than that of other periphery states. This rhythm is nothing new eight years after the outbreak of the crisis. We have many times observed the Greek government – not only the current one, but also the previous ones – disagreeing with its creditors, wasting valuable time, making markets nervous, allowing speculation and in the end voting for new austerity measures.
From the moment Greece’s creditors accept or at least tolerate the Greek rhythm, there is no danger of a Grexit or, subsequently, for foreign investments in the country, including Chinese ones.