Two years ago, the European currency union was seen as part of the firmament of the 21st century. In the past one week it has become the nightmare of 2011. Greece is on the periphy of the European Union (EU). But its fiscal profligacy and the rigidities imposed by euro membership have made it a powder-keg that is already dragging down world equity markets and could cause a relapse of the global financial crisis. All eyes are on the protests in Greece and a coming parliamentary vote on austerity measures. If the former makes the latter go awry, the Greek government will not be able to access the next part of its $110 billion euro bailout fund. Athens would then default on debts it must pay in July. Greek bonds would then be as lethal to the European banking system as subprime mortgages were to Wall Street. The EU, the world’s largest economy, and the euro, the world’s number two currency, would be in free fall. Under this scenario, this would mark the start of GFC 2.0.
On the face of it, Greece is a simple case of a small economy that went on a red ink binge and is now being forced to pay its debts. But it also represents long-standing structural problems with the eurozone. Continental economies contain simultaneous booms and busts. Welfare payments and labour migration allow the growth regions to help the recession-hit areas recover. This doesn’t work in the eurozone because economic union has stalled after currency union. A single currency, however, denies a government the ability to devalue and kickstart a stalled economy. Greece, in crisis, is thus without the full benefits of a continental economy and minus a benefit of a sovereign one.
Greece’s problem, though aggravated by its own fiscal laxity, is one that could afflict any weak European economies. This fear of contagion is what worries the European and world markets the most. However, it is a problem built into the nature of the European economic union and could easily rear its head every time a European country is mired in recession. There is no evidence Europeans have the stomach for integrating their economy further. If anything, the largest European economy, Germany, is seeing public support for unity plummet. In the short-term, optimism about Greece is hard to generate. Greece has debt repayments scheduled twice in July, again in August and so on from here to eternity. Every economic ripple will resurrect the spectre of default — and demands for greater austerity. The present crisis is just the first pothole in a long, cratered highway. Exactly the sort of thing a recovering global economy could have done without.