Greek cri­sis threat­en­ing to undo EU

A de­fault by Athens would dam­age the cred­i­bil­ity of the euro as well as the idea of an ‘ ever closer union.’

Los Angeles Times - - FRONT PAGE - By Henry Chu

LON­DON — As the Greek debt drama hur­tles to­ward a nail- bit­ing cli­max, fears are mount­ing that the out­come could sink not just Greece but also the euro and the idea of the Euro­pean Union it­self.

Athens is dan­ger­ously close to bank­ruptcy af­ter days of fruit­less ne­go­ti­a­tions with in­ter­na­tional lenders over a new bailout pack­age to keep it af loat. A Greek col­lapse could leave Euro­pean lead­ers scram­bling to pre­vent tur­moil from spread­ing to other vul­ner­a­ble Eu­ro­zone coun­tries such as Italy and Por­tu­gal.

On Sun­day night, Greek of­fi­cials an­nounced that Greece’s ail­ing banks would be closed to pre­vent a fur­ther hem­or­rhage of cash from the f inan­cial sys­tem, af­ter the pull­out of bil­lions of eu­ros by wor­ried de­pos­i­tors in re­cent weeks.

The coun­try’s banks will be closed through July 6, although of­fi­cials could shorten or ex­tend that term, and ATM with­drawals will be lim­ited to $ 66 a day, ac­cord­ing to the As­so­ci­ated Press. Peo­ple with cash and credit is­sued in other coun­tries are ex­empt from the with­drawal limit, the AP said.

The tur­moil caused the euro’s value to drop sharply in early trad­ing in Asia on Mon­day.

In a brief tele­vi­sion ad­dress — his sec­ond in less than 48 hours — Prime Min- is­ter Alexis Tsipras as­sured his com­pa­tri­ots that their sav­ings and pen­sions were safe. But the ex­tra­or­di­nary step, fol­low­ing an emer­gency Cab­i­net meet­ing, sent res­i­dents scur­ry­ing to join long lines at ATMs, some of which were empty.

Tsipras blamed the sit­u­a­tion on Greece’s cred­i­tors for re­fus­ing to ex­tend his coun­try’s cur­rent bailout past its Tues­day dead­line — the latest ver­bal volley in what has be­come a high­stakes game of chicken be­tween Athens and fel­low mem­bers of the 19- na­tion


With­out a new fund­ing deal in place, Greece will al­most cer­tainly fail to pay the $ 1.8 bil­lion that is due the In­ter­na­tional Mon­e­tary Fund on Tues­day, be­com­ing the f irst de­vel­oped coun­try to de­fault on an IMF debt.

That could cause Greece to crash out of the Eu­ro­zone, an un­prece­dented step whose po­ten­tial con­se­quences have of­fi­cials and in­vestors on edge.

In such an event, the Greek econ­omy would be thrown into chaos as the gov­ern­ment im­posed heavy cap­i­tal con­trols, rushed to rein­tro­duce the drachma and tried to pla­cate an­gry cit­i­zens and busi­nesses whose sav­ings sud­denly plum­meted in value.

Fi­nance of­fi­cials are hope­ful that they could con­tain the fall­out and keep bor­row­ing costs for big­ger coun­tries such as Spain from ris­ing to un­sus­tain­able lev­els.

But even if they suc­ceeded, the dam­age to the euro’s cred­i­bil­ity as a safe cur­rency — and to the EU’s cher­ished ideal of “ever closer union” on a con­ti­nent torn apart by two world wars — could be ir­repara­ble.

“The ob­jec­tive of the euro was to deepen eco­nomic in­te­gra­tion be­tween mem­ber states, foster a closer com­mon polity and Euro­pean iden­tity,” said Si­mon Til­ford, deputy di­rec­tor of the Cen­ter for Euro­pean Re­form in Lon­don. “It has not done any of those things. It has ac­tu­ally un­der­mined all those things. Forc­ing Greece out will only ex­ac­er­bate that dam­age.”

Euro­pean lead­ers are ea­ger to avoid a po­ten­tial dooms­day sce­nario. Pres­i­dent Obama has also weighed in: The White House said the pres­i­dent and Ger­man Chan­cel­lor An­gela Merkel agreed in a phone call Sun­day that “it was crit­i­cally im­por­tant to make ev­ery ef­fort to re­turn to a path that will al­low Greece to re­sume re­forms and growth within the Eu­ro­zone.”

But Euro­pean of­fi­cials have also ex­pressed ex­as­per­a­tion with Tsipras’ gov­ern­ment, which abruptly walked out of bailout talks in Brus­sels on Fri­day. The two sides have been un­able to agree on what Greece must do to raise rev­enue and cut spend­ing if it wants to con­tinue re­ceiv­ing aid from in­ter­na­tional lenders.

Tsipras stunned his Eu­ro­zone part­ners by an­nounc­ing Satur­day that he would put their bailout pro­pos­als to a public ref­er­en­dum next week­end. More­over, he and his left- wing Syriza party plan to urge vot­ers to re­ject those pro­pos­als, de­nounc­ing them as a recipe for more hard­ship, es­pe­cially for the poor and el­derly, in an econ­omy dec­i­mated by years of forced aus­ter­ity.

Athens has pro­posed higher taxes on the wealthy and big cor­po­ra­tions in­stead, but cred­i­tors worry that that would ham­per growth.

The other 18 Eu­ro­zone na­tions quickly closed ranks, warn­ing that they would not ex­tend Greece’s cur­rent bailout pack­age past its ex­pi­ra­tion Tues­day. That means that Athens could run out of money and tum­ble into de­fault well be­fore vot­ers even had a chance to cast their bal­lots in the plebiscite.

In a mea­sure of how much trust has bro­ken down, Euro­pean of­fi­cials took the un­usual step Sun­day of re­leas­ing their bailout pro­pos­als to show that they had made some con­ces­sions and were pre­pared to ad­dress other Greek de­mands, such as debt re­lief, when Athens’ ne­go­tia­tors abruptly pulled out.

For his part, Yanis Varoufakis, Greece’s out­spo­ken fi­nance min­is­ter, pub­li­cized re­marks he made to his Eu­ro­zone coun­ter­parts at a closed- door meet­ing Satur­day. He com­plained that the Greek gov­ern­ment’s coun­ter­pro­pos­als were “never taken se­ri­ously,” and that “com­mon ground was thus sac­ri­ficed in fa­vor of im­pos­ing upon our gov­ern­ment a hu­mil­i­at­ing re­treat.”

In many ways, Tsipras’ ad­min­is­tra­tion is caught in a bind of its own mak­ing. He swept to power af­ter elec­tions in Jan­uary on the strength of cam­paign prom­ises that many crit­ics warned were ir­rec­on­cil­able.

“They’ve de­vel­oped a nar­ra­tive of ‘ We can have our cake and eat it. We can be in the Eu­ro­zone and end aus­ter­ity,’ ” said Kevin Feather­stone, an ex­pert on Greece at the Lon­don School of Eco­nom­ics.

Those goals are es­sen­tially mu­tu­ally ex­clu­sive in the present cli­mate. Led by Ger­many, Greece’s cred­i­tors have shown vir­tu­ally no will­ing­ness to de­vi­ate from their pre­scrip­tion of heavy public­spend­ing cuts in ex­change for bailout funds.

Feather­stone said that hold­ing a ref­er­en­dum on such short no­tice could con­tinue to blind Greeks to that fact.

“With one week of a ref­er­en­dum cam­paign, there’s plenty of scope for emo­tion rather than ra­tio­nal cal­cu­la­tion,” he said. “A longer cam­paign, even two weeks, would al­low for more con­sid­er­a­tion of all of the im­pli­ca­tions of what Greece is about to do.”

Even if vot­ers ac­cepted the cred­i­tors’ pro­pos­als, another po­lit­i­cal cri­sis could en­sue. Af­ter hav­ing cam­paigned against the deal, Tsipras’ gov­ern­ment could col­lapse. Or cred­i­tors might have no con­fi­dence that he would im­ple­ment mea­sures he pub­licly op­posed.

For all their ir­ri­ta­tion, Euro­pean of­fi­cials know that their rep­u­ta­tions, too, would suf­fer from the fail­ure to reach an agree­ment with Athens.

They also know that ex­pul­sion of Greece from the Eu­ro­zone would call into ques­tion the whole idea of the EU. The euro is in­tended to serve as per­haps the most po­tent sym­bol of Euro­pean amity and unity af­ter a cen­tury of war and di­vi­sion; in­deed, na­tions wish­ing to join the EU must com­mit to adopt­ing the cur­rency. Eu­ro­zone mem­ber­ship is sup­posed to be ir­re­versible.

A Greek exit from the euro would ex­plode that idea, and could start un­rav­el­ing the pro­ject of greater Euro­pean in­te­gra­tion.

And in­vestors would have grounds to fear that other, larger coun­tries could also aban­don the euro in tough times. Trust in the com­mon cur­rency could evap­o­rate.

“Clearly, once a coun­try leaves a cur­rency union, that cur­rency union be­comes to all in­tents and pur­poses an ex­change- rate mech­a­nism, not a cur­rency union,” said Til­ford of the Cen­ter for Euro­pean Re­form. “If they do force Greece out, there’s a very real risk of con­ta­gion at the next down­turn.”

That’s why, he said, Euro­pean lead­ers have al­ready tried to cush­ion the im­pact of a po­ten­tial Greek exit by paint­ing Greece as an out­lier.

“There’s re­ally go­ing to be a con­certed at­tempt to por­tray this as one bad ap­ple ... that Greece leav­ing doesn’t tell us any­thing about the long- term suc­cess of the cur­rency union,” Til­ford said. “That’s go­ing to be the nar­ra­tive. But I think that’s go­ing to be just a nar­ra­tive shared by Eu­ro­zone gov­ern­ments.”

There were a few signs Sun­day that Greece’s cred­i­tors were try­ing to coax it back to the bar­gain­ing ta­ble.

Alexan­dros Vla­chos Euro­pean Pressphoto Agency

PEO­PLE LINE UP at an Athens ATM. Greece an­nounced Sun­day night that its banks will be closed through July 6, and ATM with­drawals will be lim­ited to $ 66 a day. The tur­moil caused the euro’s value to drop sharply in early trad­ing in Asia on Mon­day.

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