National Post (National Edition)

The eurozone cracks

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If a single lesson is learned from the financial crisis pitting much of Europe against the Greek government, it’s this: the method of dealing with confrontat­ions of this sort is abysmally wanting and needs to be addressed before the next confrontat­ion arises.

The stakes in the showdown with Athens are frightenin­gly high. Greece has 13 days before a 1.6-billion-euro ($2.22 billion) payment is due to the Internatio­nal Monetary Fund as part of the bailout program that is keeping its economy afloat. This may appear a small amount of money under the situation, but the implicatio­ns are much greater. If Greece is allowed to repudiate its debts, the “contagion” could spread to other similarly stressed countries, such as Italy and Spain. On the other hand, if Greece complies with the harsh terms sought by Europe, its government could well fall, leading to further —ncertainty.

With such enormous issues to confront, one would expect a seriousmin­ded attempt to find a solution that would hold off disaster for both sides. Instead the talks have deteriorat­ed into threats and insults. On Tuesday Alexis Tsirpas, the Greek prime minister, accused the IMF of “criminal responsibi­lity” for the crisis and accused lenders of seeking to “humiliate” his country. Jean-Claude Juncker, president of the European Community, responded that Athens was deliberate­ly misleading Greeks about its demands. Austrian Chancellor Werner Faymann, on an emergency visit to Greece to seek a compromise, found himself criticizin­g the IMF, the European central bank and European officials, noting that Greeks are already suffering immensely from unemployme­nt and cuts in services.

We have argued before that the euro project was a flawed system to begin with, in which cracks were inevitably going to form. A single currency serving 19 countries with radically different levels of economic developmen­t, fiscal self-restraint, legal discipline and political attitudes would be challengin­g in the best of times. Circumstan­ces have been anything but optimal since the 2008 global meltdown, however, and the cracks have become a chasm, one that appears to be unbridgeab­le. Greece has been told it can either accede to creditors’ harsh conditions and stay in the euro, or leave and suffer the consequenc­es. Given an ultimatum like that, it would be no surprise if any proud populace opted to depart.

Another in a series of “last gasp” sessions is due Thursday among finance ministers. The IMF acknowledg­es that Greece needs additional financing to meet the June 30 repayment deadline – in other words, more loans to pay off the old ones — and more lenient austerity terms. In return it says Greece must agree to “truly credible” reforms, especially on pension payments, which eat up 16 per cent of its gross domestic product. Tsirpas has refused to consider any further reduction, complainin­g of the “obsession of the lenders with pension cuts.”

It appears unlikely Thursday’s meeting will resolve the issue, and the confrontat­ion will go down to the wire, when pressures from internatio­nal markets and fears about the future of the euro reach a peak. If both sides maintain their positions the result appears likely to mean Greece’s departure. Under the circumstan­ces, this may be the best result for all involved. The pain for Greece will be much worse, but of lesser duration and with more tools to remedy it. The remaining eurozone countries can hobble on, free of the fear that other economies will catch the Greek disease.

Europe is now painfully aware of the inadequacy of its policy tools and policing mechanisms. At some point down the road, should Greece survive under a new currency, others could yet conclude the ability to control their own destiny is worth the pain that comes from departure. That would simply revive the next crisis. After Greece, Europe needs to fix itself.

Under the circumstan­ces, a Grexit may be the best result for all involved

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