September is going to be an important month for the Eurozone. Or so said Jim O’Neill, Chairman of Goldman Sachs Asset Management, when we interviewed him for Debating Europe:
September is going to be a huge month. We need to have clear, decisive leadership.
Unfortunately, it’s not immediately clear that such decisive leadership will be forthcoming. Whilst the “Jean-Claudes” (Trichet and Juncker) are trying to cope with the European debt crisis, the new IMF chief Christine Lagarde has come under criticism for opening up a new front by suggesting that Europe’s banks may also be in trouble. Meanwhile, whilst European governments are trying to bring the festering crisis in Greece back under control, Finland is busy demanding collateral on its loans from the Greek government in separate negotiations. The message is neither clear nor decisive.
If Europe’s leaders can’t solve the crisis, perhaps we should just accept defeat. Some commentators have been suggesting that an orderly Greek default now is preferable to a chaotic (and inevitable) default somewhere down the road. This could allow the Greek economy to ease up on austerity and start investing in growth again, rather than spending more and more money on just servicing its debts with no end in sight.
We put this suggestion to Jim O’Neill:
I have strong sympathy for that view; if it just defaulted without anything else happening at the same time. However, I think that Greece’s debts are so big, it’s going to be impossible for it not to effect the rest of Europe – so why take the risk?
The risk is, of course, that a Greek default would send shockwaves through the fragile global economy and spark off another financial crisis of the kind seen following the 2008 collapse of Lehman Brothers in the US. With the benefit of hindsight – was the decision to allow Lehman Brothers to collapse the right one?
I think, in hindsight, definitely not in the style it collapsed. And maybe it wasn’t the right decision.
That uncertainty is precisely the reason politicians are so anxious to avoid a Greek default. If Greece could be allowed to default without affecting the rest of the global economy, it would have been pushed to do so months ago. However, given that the Greek economy is so wound up with the rest of Europe (and, indeed, with the rest of the world), the possibility of a second “too big to fail” collapse right now is hardly appealing. As Jim O’Neil says, why risk it?