Greek voters are returning to the polls on Sunday, leaving hanging in the balance the future of the country’s membership in the Euro and heightening general uncertainty about the future of the EU as a whole.
In 1952, German Chancellor Konrad Adenauer and French Prime Minister Robert Schuman introduced the beginnings of European integration, uniting the coal and steel industries of France, West Germany and the Benelux countries. Over the next 50 years, the integration process would come to include a club of 27 states, becoming the European Union, which now stands at a possible breaking point. Since its creation, the European Union has both expanded in number and deepened in purpose. Initially a common market with subsidies to farmers, the EU has evolved into a community with coordinated foreign aid and trade policies, open borders among members, a common social policy and a powerful European Court. Nevertheless, the problems of monetary union began in 1992 with the Maastricht Treaty which began the process of monetary union and was intended to begin economic convergence among member states. The second part, economic convergence, was and is today the hurdle facing the members states of the EU. The Stability and Growth Pact, introduced by France and Germany, was meant to harmonize interest rates, inflation and government deficits; yet, there were no enforcement measures and the sponsors of the pact, France and Germany, were the first among the states to breach the regulations on deficit as they both exceeded deficits of 3% of GDP. So saying, how Europe handles the unbalanced economies of its members and its headlong expansion will decide whether the Eurozone recovers from its contagion or slowly disintegrates.
“Today we open the path towards a better tomorrow, with our people united, dignified and proud. To a Greece where there’s social justice and progress – an equal member of a Europe that’s changing. Today the people of Greece spake. Tomorrow a new era begins for Greece.” – Alexis Tsipras, leader of the Syriza party
The first challenges to overcome is the Greek’s second attempt at a decisive electoral process, coming after an indecisive round in May resulting in the rise of polar opposites in the party system. If a working majority emerges under the leadership of the New Democracy Party, Greece has a likely chance of following through its austerity measures, despite animosity and criticism therein involved. These measures would perpetuate Greek membership in the EU, appease its troika (European Commission, International Monetary Fund and European Central Bank). Even if this pro-bailout government is formed, the political paralysis of Greece has already put it behind on its obligations to privatize state industries and improve tax receipts. If this weekend’s election extends the paralysis begun by May’s vote, the uncertainty whether Greece can remain in the Eurozone will intensify, resulting in another volatile yo-yo of international markets. Moreover, the uncertainty in Greece would also intensify the pressure on Spain and Italy. The combined economies of Ireland, Portugal and Greece – three countries that have been bailed out – are smaller than half of Spain, which the Eurozone could not afford to have fail, becoming a ‘too big to bail, too big to fail’ member. The EU’s willingness to help bailout Spain’s massively indebted baking system has already surpassed the amount of 100 billion euros. Spain’s financial future is highly questionable as Moody has cut Spanish sovereign debt to just a notch above junk status, on par with Azerbaijan. Unemployment has also reach record highs, with youth under 25 years of age at 50% unemployment, and house prices are also collapsing. Nevertheless, another possibility in the Greek elections is that the left-wing Syriza party emerges with a majority, and with its commitment to depart from current bailout agreements like the austerity measures, Greece could very well anticipate a ‘disorderly exit’ from the Eurozone.
“This is the financial equivalent of the Cuban Missile crisis. And the missile is really a bank run, which ultimately even the Germans can’t be completely immune to. Not that there will ever be a run on Germany banks, but the effects of a bank run across Southern Europe are going to be felt by the economy.” – Niall Ferguson, Harvard historian
So saying, the future of Europe is at a crossroads, with only a few future scenarios on the horizon. The first and worst scenario is a disorderly collapse of the Eurozone, starting in Greece but spreading to Spain and Italy. This scenario would be likely with anything less than a clear victory, the Greek state could fail to meet its troika obligations and would not receive any further bailouts, essentially imploding upon itself. According to the Greek economic minister, Greece only has enough money to run effectively until July 15. If this case were to emerge, Germany has stated that it would put fiscal rectitude ahead of its pan-European principles. Without Germany’s bankroll to help support many of the peripheral member states, the scenario could result in the Eurozone being reduced to a Franco-German core, with the Benelux states attached. For the rest of Europe and its economy, the consequences would be calamitous; with governments defaulting on debt, a prolonged recession would be a certainty all across the European continent. The second course is that Europe stumbles through whilst still attempting to achieve banking and fiscal integration. Given that 80% of Greeks want to stay in the Eurozone, a Greece-troika compromise is not so unlikely and would also bring the country back from the edge of default. A full recovery would be years away but the country would no longer be the spark to ignite the powder keg of defaults as seen in the first scenario. The new European Stability Mechanism, due to come into effect next month as a permanent rescue fund, would help recapitalize banks and help cool yields on vulnerable sovereign debt. With 500 billion euros at its disposal, the ESM would help the EU progress towards Chancellor Merkel’s growth agenda. Germany aims to move towards a banking union that would insure deposits, progress toward common tax policies, the decline of government debt and the emergency of the Eurozone from its recession, all of which would help ease the pressure on governments struggling to find a common ground. Though an imposing task, the struggled of the agenda are in Germany’s best interest because 60% of their exports stay inside Europe and without those trading partners, the German economy would be severely impacted. The final future scenario for the EU is a move towards much closer integration, the fulfillment of the economic convergence promised in 1992. The new French President Hollande has made this his montra, seeking to stimulate growth and imagination and creativity to deepen financial union, such as a joint fun to pay down debt. Though it would seem to be a more secure and ideal scenario, the prospect will not gain support from a European public no longer convinced of the benefits of a deeper integration, nor of a German state unwilling to allow more countries to sign onto their bankroll.
“Germany’s strength is not unlimited. The way out of the crisis can only be successful if all countries are capable of recognising the reality and realistically accessing their strengths.” – Angela Merkel, German Chancellor
In retrospect, the EU was intended to create a fiscal union of members that would be able to avoid repeating mistakes made in the 1930s, yet it seems that the cliff facing them now is illustrating that they have not been able to avoid those mistakes. Unless the EU community is able to recognize the choices that have been and those that must be made now for the security of the union, and not of individual members, the EU will most likely cease to exist or be severely reduced in membership and fiscal integrity. They must enter a much larger form of integration, both political and economic, committing to a more federal system.