The FINANCIAL — Greece has set June 17 as the date for the next elections. There is only one issue for the electorate to vote on: does Greek accept the austerity packages imposed on it or leave the euro zone.
Most Greeks would like to be in the euro zone and not go back to the drachma. Euro gives a greater level of flexibility and indeed a greater sense of belonging to the rest of Europe, although some ten countries in the European Union have not adopted the euro, Britain being the most significant of them. But, conditions laid on Greece for its bail-out package are harsh, intolerable and humiliating. Greeks will vote against them as a matter of pride and trigger Europe’s next phase of struggle to maintain its political and economic cohesion.
If Greece opts to leave the Euro zone, the consequences for European banks, including that of the European Central Banks are simply disastrous. They will remain totally exposed to massive loans to Greece which need to be simply written off, sending many banks to the wall. The most dreaded free fall of Spain, Ireland, Portugal and Italy, already in turmoil, will accelerate, brining about an unprecedented catastrophe to Europe and indeed to the world. That will lead not to recession where the average of Europe’s GDP now stands are zero, but to a more painful and unbearable depression. The US economy which is showing signs of recovery will again get battered. Emerging markets which have been more resilient during the last years will begin to slow down.
One does not know in full what goes behind the brave faces and smiles of IMF’s Christine Lagaard and the leading actors in this saga. Angela Merkel who defiantly champions austerity as the only way out of the current impasse is getting increasingly side-lined by France’s growth-directed, non-austerity policies. Her own electorate feels that propping up non-performers in the euro zone with German tax payers’ money is not a welcome idea.
If Greece is the only nation in the deepest trouble and wishes to exit the euro zone, leaving behind a trail of bad loans of some $400 billion to European banks, it will not be a major disaster. It can be managed, with certain stringent conditions imposed on Greece that it does pay its debts with interest over a longer period of time. The danger is not necessarily from Greek’s default and bankruptcy, but the other bigger defaults and bankruptcies to come from Ireland, Spain, Portugal and Italy. European Central Bank can indeed print money and through the dubious Quantitative Easing mechanism (the US and Britain have been doing this for some months now), keep the banks operating without after-shocks, but to do this, the euro must remain a global currency with some strength. Or else, euro would be in the trash bin of history, with the American dollar taking back the lost territory in the global currency wars.
I have a lot of empathy for Angela Merkel and her approach. In a way, it is also typically German. The German tax payers still continue to pay for the reunification of East and West Germany. German tax payers still pay for the nation’s global development agenda where large amount of money is poured out to help developing countries. They are still paying for bail-outs, like the American tax payer who has paid for the bail-out of banks falling by the wayside with “toxic assets”, although, after all these months and years of debates on how to manage funds prudently, JP Morgan just lost $2 billion in what the CEO called a “stupid and sloppy” transaction in its offices in London. Merkel is holding on to a line of thinking where Europe and the global financial markets need discipline and accountability which includes curbs on excessive and unnecessary spending. I have a feeling that she believes within herself that Greece has continued to help itself to large amounts of funds through indiscriminate borrowing, has attempted to enjoy a standard of living that it did not deserve and that the nation’s recession and current bankruptcy is entirely of its own making. If Greece is let out of the cage free of any austerity, it is not only that Greece will not learn its lessons, but that the other near-default nations in Europe would learning nothing from the crisis.
The saddest lesson from all this turmoil and uncertainties is that the younger generation, out of school and trying to find a job, are staring at a blank wall, with no or little hope of getting a job. Youth unemployment in Greece, Spain, Italy, Portugal, Ireland and indeed across much of Europe is at a boiling point. In Greece, over 60 per cent of youth have no jobs. The psychological trauma of not having a job when you are young is often greater than when you are old. It also tends to create young societies to become disillusioned with life, lose respect for authority, breed criminality and develop an underground of social disorder which will not be conducive to any planned development process or economic growth in the future.
All eyes are now focussed on Germany to steer the world out of a total disaster. The nation itself has posted a positive growth, giving hope to its people and to Europe that the last trump in the game is yet to be played. Although Francois Hollande in France is exuberant of the socialist win in the elections and is looking to drive France out of trouble through a “growth strategy” rather than austerity, I feel that clever long term strategies for Europe’s and global stability are not hinged on either austerity or growth, although the standard principle is the combination of both. The more over-arching strategies need to deal with the bigger and more critical institutions of banks, the stock markets, expenditure in military technology and hardware, the engagement of nations in wars in other countries, and the redistribution of wealth more equally among a larger segment of the population, not through social security and hand-outs, but through real time personal and family development.
Germany has demonstrated a more liberal and independent thinking on a number of global issues and has earned itself a great deal of respect. It has also broadened its non-militaristic foreign policy horizons to engage itself positively and enthusiastically in solving major crisis such as the one at hand. To a large extent, its leadership in Europe is justified. Its leadership will however be judged by its current role and outcomes in consolidating and strengthening the euro zone and gradually uplifting the economies of the rest of Europe. I do not see this role and the responsibility to be assigned to France or any other country, although Germany cannot deliver entirely on its own.
Leadership qualities are often put to the test during the worst times of a crisis, when friends and close associates distance themselves and watch the evolving drama from the sidelines. Often, it is only historians, years later, who document the leadership qualities of a statesman. I feel that Germany now is very much alone in keeping euro zone afloat and ensuring Europe’s strength. The situation, the politics surrounding it, the actors, the stakeholders are all very complex. This may be Germany’s finest hour.
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