Alexis Tsipras, the prime minister of Greece, at a joint press conference with Martin Schulz, the president of the European Parliament
It feels like 2009 all over again in Europe. Greece is in the headlines clamoring of an exit from the Eurozone. This comes after the election of a new socialist government under Alexis Tsipras, who ran on a platform of ending austerity and privatization, as well as “regaining Greece’s dignity and sovereignty.”
The third and most appealing of these campaign promises was a clear jab at Greece’s “troika” — the IMF, the European Commission, and the European Central Bank. Since the bailout of Greece in 2009, auditors from these three lenders have been in and out of Athens, scrutinizing and slashing Greece’s books. To the locals, they are not saviors, but loan sharks who have humiliated the country for the last five years.
“Regaining dignity” in blunt terms means renegotiating Greece’s bailout program. Tsipras hopes to not only change the future course of the program, but to also gain a write-off of previous Greek debt. He and his controversial finance minister, Yanis Varoufakis, have been on a European tour making their case. Northern Europe, however, has shown much less warmth to the two than the streets of Athens.
German Chancellor Angela Merkel is reportedly “unlikely to agree to a bilateral meeting” with the newly elected Greek Prime Minister. Eurogroup President Jeroen Dijsselbloem, who did meet with Varoufakis, coldly said, “We have not yet concluded if there will be an additional extension,” for the Greek bailout program, which ends in March. German Finance Minister Wolfgang Schaeuble stated bluntly that Germany “cannot be blackmailed” by Greece. The ECB, for its part, has recently barred Greek government bonds from being used as collateral for lending money to commercial banks, which essentially cuts off cash access to Greek financial institutions.
The troika certainly seems to be in no mood to renegotiate current plans, let alone forget about any debt.
So what to do? In the event of an actual Grexit, the Euro will not only lose one of its first members, but certainly its legitimacy as well. Other Eurozone countries with struggling, but more important economies, like Spain and Italy, might also reconsider their allegiance to the single currency zone. In a domino effect, the Euro could soon be having its burial. European officials, like the ones mentioned above, ought to foresee this. On the other hand, Prime Minister Tsipras should realize that his country’s finances will evaporate by March, when the current bailout program ends. His predecessor, after all, had warned everyone of this.
With stakes this high, negotiations will forge ahead, in spite of the drama. There have been signs of lukewarm thawing — European Commission President Jean-Claude Junker, for example, has acquiesced that “we should be able to replace the ‘troika’ with a more democratically legitimate and more accountable structure,” after speaking with the Greek PM. No mention of forgetting debts, but an olive branch nonetheless. Other Eurozone leaders, who also have been complaining about German-led austerity, like François Hollande and Matteo Renzi, have shown some sympathy toward the Greeks.
The new government in Athens has similarly adopted a more conciliatory attitude. Just like most post-election leaders, Tsipras has taken a step back from his platform and declared that he will not fight with Greece’s creditors. Easing off his fiery rhetoric, Varoufakis has proposed a bridging loan program that would allow talks to continue into May after the expiration of the bailout. If the past five years are any indication, both parties will manage to reach an emergency, short-term agreement.
This will not be enough, however. Economic recovery, let alone growth, has been stagnant in Europe since the debt and financial crises. The Eurozone, in particular, is currently suffering deflationary pressures, with record low inflation rates.
Launched on January 1, 1999, the Euro was a strange, but bold experiment that was not always subject to the same bad press as it is today. In fact, the Eurozone underwent an early period of rapid expansion, during which many countries were very eager to jump aboard. By 2007, the Euro became second only to the US dollar in currency reserves and transactions; even Alan Greenspan noted that it could take over as the main global currency. And, despite the crisis, McKinsey & Co. has measured that “membership of the euro brought an overall benefit of €330 billion in 2010.” Along with the European Union, the Eurozone has further united a continent that plays second or third fiddle in a unipolar/bipolar world. These benefits, especially the political ones, are indispensable if Europe wants to stay relevant globally.
To keep the monetary union viable, the troika and Germany should propose some form of debt forgiveness. Greece’s debt of €315bn ($357bn), around 175% of its GDP, is certainly unpayable in the foreseeable future. Many economists, in fact, see Germany as half of the debt problem: German lenders were as risky as Greek borrowers. While debt must be paid, it perhaps can be mollified if the monetary union is at an existential risk.
A fundamental problem with the Euro that economists often point out is the diversity of Europe. The lack of exchange rates, as well as differences in labor productivity, production outputs, and wages among member countries, all result in an unequal distribution of benefits in the single currency area. The competitiveness of countries like Italy and Spain has been diminished by an overvalued Euro that is just right for Germany. Remember that Rome, Madrid, and Athens cannot change their monetary policy: the ECB in Frankfurt sets it for them.
Lessening these differences should be a priority in order to keep the Eurozone intact and viable. To bolster growth, Europe can adopt some US-style policies. Mario Draghi, ECB President, has already begun that trend by announcing an unprecedented 1.1 trillion-euro quantitative easing plan to increase spending and investment.
Monetary policy cannot solve everything, however. Austerity should be used to prevent another debt crisis, but to a less extreme and painful extent. With whatever extra funding is left over, Eurozone governments should increase spending to invest in their human capital to remain competitive. Entrepreneurship and R&D, instead of public sector investment, should be encouraged. They can even take the un-European step of lowering taxes. Something new must be tried.
Squeezed between two economic powers, Europe must find its forte in relatively less crowded fields like alternative energy. Its currency, the Euro, cannot stand in the way of growth, but has to promote it. Otherwise, it will be only a burden, and one that won’t last very long.
Matt Lam is a sophomore at Cornell University, studying Economics in the College of Arts & Sciences.