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?
Not now – if Greece’s defaults now it would make the leadership of the eurozone seem very weak. This would have an adverse effect.
The speculators will have a field day and will then target the next potential defaulter probably Portugal or Ireland.
The eurozone desperately needs stronger leadership to resolve this problem, which requires a long term, zone-wide solution.
My solution would be a Marshall Plan type project as suggested in my comments on whether Germany should leave the euro.
I tend to agree with Mr. O’Neill on this issue. The risk of a Greek default affecting the eurozone and consequently the global economy is imminent, given the exposure major European banks have in the country and the share of the global economy the eurozone commands.
However even if the bank’s exposure to Greece was minimized and their position consolidated, there still are a couple of reasons that will keep the threat of a broader collapse alive.
The first is that market pressures will move on to the next most likely “candidate” to follow the path of Greece. More specifically the markets will turn their attention to the other two countries that have so far received bailouts, Ireland and Portugal, and there will most probably be speculation regarding the future of Spain, Italy (and even other countries of the European core – not to mention Cyprus that is already one step away from the need of a bailout).
The second issue is that if Greece eventually defaults, it will most probably re-adopt its national currency, the drachma (unless European leaders come up with another rabbit from their hat -which I do not think is feasible), which implies that inflation will sharply rise within a few days (if not hours), leading to hyperinflation. This means that Greece will have absolutely no capacity to trade with its European partners under free market conditions, since she will have to impose protectionist measures in an attempt to safeguard whatever is left of her economy.
The protectionist measures, together with the massive depreciation of the Greek currency, will have two effects: (a) Greek exports will become very cheap and therefore will be preferred over the equivalent products of Greece’s competitors, who are also part of the Euro (therefore the competing countries will suddenly lose competitiveness and will have pressures to make their product cheaper – which is not easy to do), (b) Greece will act like a black hole that will absorb all the money that is thrown her way without giving anything away (since she will mostly export and not import). This will understandably destabilize trade, which again will have negative implications for the rest as it will as well lead to a vicious cycle.
At any rate the catastrophic implications of a Greek default are such that force European leaders to devise any sort of action that will prevent them. I am afraid though that European leaders have massively failed to address the crisis, not only in Greece but also at a European level and their efforts, no matter how sincere may be, will not prevent the worst from happening.
The safest way for Greece and any other country to avoid defaulting on its debt obligations, is stable growth, yet this is something that has long disappeared from Greece, which is experiencing a serious recession and things are not expected to improve. Greece (and the rest of Europe in fact) is in dire need of a growth spree that will push the wagon out of the mud, in which is now stuck. The country will also need a considerable reduction of its debt burdens as the reduction that will derive from the voluntary involvement of the private sector in the second bailout, will only reduce the debt by a small margin.
Unfortunately the packages that aim to prevent a Greek default focus on consolidating public finances and give second or even third priority to growth and debt reduction, which frankly speaking is a self-defeating policy. Reforms in the Greek economy must certainly take place, but if other things are not met, these will not be enough to lead the country out of the crisis.
Mr. O’Neill speaks of a much-needed leadership which is certainly a prerequisite to stem the crisis. I personally believe in something much more than that: a much-needed new strategy that will address the crisis as it really is – as a systemic crisis of the euro that requires audacious system-wide solutions.
Another way to ask this question is “what does a Greek default accomplish?” Those who think that Greece will be somehow liberated once its debt burden is lifted have too simplistic a view of what plagues the Greek economy. Debt is a symptom for Greece, not the underlying disease – and it is never sufficient to treat symptoms alone.
Similarly for Europe, a default, besides triggering a wider banking crisis, does little to resolve the Union’s two main predicaments: first, that the periphery suffers from serious structural economic problems; and second, that the EU is stuck in neutral, too strong to fall apart but too weak for foreful unity.
Europe has neither legitimacy nor policy levers to deal with either the economic or the political crisis. Only a slow process of political bargaining and persuasion can change that. And it is not clear that a Greek default would either resolve that political predicament or expedite the arrival of a grand bargain.
Greece should be allowed to default, unless Germany etc are prepared to take on the debt themselves and form a full political and economic union with the rest of the zone. Germany / Strong northern Europe needs to decide what kind of Eurozone it wants.
The Greek austerity program imposed is counterproductive. If Greece remains in the Euro , it’s deficit will not shrink and its debt will continue to grow. The risk of an unplanned political event will rise as the economy continues to deteriorate.
There is no way Greece can leave the Euro. However if the Stronger northern states don’t want a full union they can leave the zone and either form another union or revert back to national currencies. The old ECB can then deal with Southern Europe without worrying about German inflation.
The European banking system that holds trillions of Greek and other Eurozone government bonds needs an unlimited guarantee backed by central banks ( the printing press) to restore confidence and prevent bank runs.
Either option will cause massive short term upheaval and worsen the already approaching recession. There is no easy “fudge” way out. Business and Consumer confidence is plummeting due to the risk of Greek, Irish, Portugese, Italian and Spanish default and economic collapse.
How is there going to be a sustained economic recovery in Europe until a clear solution is offered?
German / Northern European politicians need to step up to the plate, and lead things one way or the other.
Le problème de la Grèce est financier et le problème de l’Europe est politique.
Par ailleurs, on voit s’accumuler de sombres nuages au-dessus de la méditerranée orientale entre la Grèce, la Turquie, Chypre et Israël, le tout dans un monde arabe en pleine mutation dont on ignore le nouveau visage à venir.
Je serai bref :
– l’Europe envoie ses armées (par ailleurs peu utiles) aux frontières orientales comme garantes d’une longue paix, protégeant la Grèce, Chypre et les zones d’intérêt économique exclusives de l’Europe – dont l’exploitation sert à garantir la dette grecque et européenne sur les marchés…
– la Grèce réduit proportionnellement ses dépenses militaires et alloue directement cet argent dans une politique d’investissements et de croissance économique (avec la supervision efficace de Bruxelles).
– L’Europe acquiert une puissance politique stabilisatrice qui rend la confiance dans les marchés, la Grèce et l’euro sauvent la face, la construction européenne prend un nouveau départ.
Un coup de force géopolitique de l’Europe avec de nombreux bénéfices économiques.
Mais il faut faire vite…
Most of protests are Staged and very well Orchestrated, they pretend fighting but do not hurt each other. This is worth it to get hundreds of billions from EU. Greeks are very smart; the deception started with the Trojan Horse and is going on with very well orchestrated “PROTESTS”. If you want Greece to be paid off, for the Enormous Army, Universal Free Health Care, Lucrative Pensions, and Taxes that they never Pay, then you pay them by yourself, PAY THEM OFF, BY YOUR OWN POCKET.
DON’T LET GREECE TO DRAG YOU DOWN. CUT OFF THE ROPE, AND LET THEM GO FIRST…Because A fed bear is a Dead Bear.
@bluerose, what are you talking about? Protest in Greece are staged? You must be out of your mind and your oppinion is rubbish…
The bigest problem of EU is Germany. Germany must get out of Europe, all the problems come from their greed and their compulsive need to control the other.
When will Germany pay Greece war compensation for the damages that made to Greece in WWII? Germany owes to Greece not Greece to Germany.
Bluerose, you live in la-la land my dear…As JP mentioned, it is Germany who owns to Greece, not vice versa…Greece is the nation that gave the most to Europe, and got very little back..From our stolen antiquities that the western and northern Europeans were trading with for so long, before put them in their museums and make more money with them, from our culture, our men and women in wars that other Europeans have started, from our gold and money that were stolen by the occupations from Europeans (the Nazi’s most notably)..how do you compensate all this? Get real..when the western and norther Europeans stop being so greedy, then they will stop paying for other nations that they do not allow to prosper and progress, because simply, if Greece becomes as rich as them, who will be there to buy their cars, and sub marines, and planes, eat their food ( lidl, carrefour) buy their furniture (ikea) and so on…?? You owe us my dear…now pay up, and let us prosper, or keep paying for us as you have put us in permanent social welfare….