The fortunes, or misfortunes, of Greece continue to bedevil the countries of the eurozone monetary union, and the fundamental flaws at the heart of the eurozone’s design are again clear for all to see: Without a political union to underwrite a federal eurozone and its banks, or member states and their banking systems, the current monetary union will be vulnerable to recurrent crises. The time has come for the euro-area’s leaders to face up to the decision: Either accept Greece’s default and exit from the euro (a Grexit), or create a political union that is financially strong enough to underwrite the debt of any entity within it — federal, state, bank or other.
Countdown to crisis
On Jan. 25, Syriza was elected as Greece’s governing party on the back of an anti-austerity platform. The new administration appeared intent on a course of non-compliance with the tough conditions set for its bailout by the country’s creditors — the troika of the International Monetary Fund (IMF), the European Union (EU) and the European Central Bank (ECB). Gambling that the eurozone could not afford to allow Greece to leave the currency union, the Greek government embarked on a policy of brinkmanship, apparently determined to squeeze some degree of debt relief from their creditors.
The stand-off continued until late June when deposit withdrawals from the Greek banking system reached a crescendo — about 2 billion euros over the weekend of June 19 to 21, and more in the following week. For Greece to survive the crisis it was necessary for the country to receive its final 7.2 billion euro tranche of the bail-out by June 30, enabling it to repay the IMF. It was at this point that the Greek government seems to have blinked, bringing to Brussels a plan to impose greater employee and employer contributions to pensions, gradually increase the retirement age, raise value-added taxes on electricity and processed foods, and increase corporate taxes on larger firms. But the eurozone leaders and IMF Managing Director Christine Lagarde rejected the Greek proposals as inadequate, precipitating the next phase of the crisis.
The crisis intensifies
With Greek banks ever more dependent on Emergency Lending Assistance (ELA), the decision over the past weekend by the ECB to cease ELA loans has brought the Greek banking system to its knees, forcing a closure of all Greek banks this week. Limits have been imposed on cash withdrawals from ATMs, and capital controls were imposed by decree just before 3 a.m. on Sunday, June 28. These measures will inevitably bring a huge number of payments and transfers to a halt, devastating the economy. Following the run on the banks for cash it is likely there will be runs on shops and supermarkets for daily commodities.
At the time of this writing, the Syriza government has legislated for a referendum for the Greek people to decide whether the terms of the troika’s proposals are acceptable, but this will be after the payment deadline has passed, implying the offer is no longer on the table.
Time for a decision
As stated earlier, the time has come for leaders to either accept a “Grexit” or to create a political union that can bolster the current monetary union. In my opinion, it makes no sense to continue with the pretense that the European Stability Mechanism, the banking union or the reliance on member states to obey fiscal rules are anything other than the euro-area equivalent of “extend and pretend” central bank policies.
Read more about global economy by John Greenwood.
