Colm McCarthy: We should be very afraid for both Greece and Europe as chaos looms
The European Union must accept its share of the blame for the catastrophe that may engulf that country, writes Colm McCarthy
Published 17/06/2012 | 05:00
TODAY'S election in Greece could result in that country's exit from the single currency, possibly even from the European Union, and a descent into the turmoil and instability which marked its history through most of the 1900s.
If Greece is ejected from the eurozone it will be a disaster for Greece but also a tragedy for the European project, whose greatest gift to the people on the eastern edges of Europe has been political stability and the opportunity to heal the scars of history.
The current century started well for Greece. It joined the eurozone in 2001, promising the benefits of currency stability and greater integration into the European economy. The Balkan conflicts of the 1990s were being resolved and Greeks must have felt few regrets on departing the 20th Century.
Eurozone membership has turned into a catastrophe for Greece, resulting within barely a decade in the largest sovereign default in history.
If the new Greek government renounces the revised deal with the EU and IMF, ejection from the currency zone and financial chaos are the most likely outcomes. But Greece has had a century of chaos interrupted by brief periods of democracy and economic development.
The First World War started in the Balkans -- not with the assassination of the Austrian Archduke Ferdinand in Sarajevo in 1914, as is so often asserted -- but in the earlier Balkan Wars. Greece, Bulgaria and Serbia attacked the Ottoman (Turkish) empire, still occupiers in parts of the Balkan peninsula, in 1912. The Ottomans lost extensive territory. The following year, Bulgaria attacked its former allies, seeking the return of territory in Macedonia. It lost and that dispute still smoulders.
A principal consequence was Turkey's choice of alliance with the losing Hapsburg (Austro-Hungarian) empire and Germany when the main event got under way in 1914. Both the Hapsburg and Ottoman empires, which had contested the Balkans for centuries, collapsed in defeat.
Greece unwisely sought to exploit the weakness of the new Turkish state, invading with the encouragement of the victorious powers to regain territory in western Turkey. It lost heavily and over a million Greek residents, including virtually the entire population of Izmir (then Smyrna), were expelled back to the mother country in a chaotic and bloody population transfer. Turkish residents on the European side of the Bosphorus were displaced eastwards.
The population of Athens more than doubled and the country experienced desperate poverty and political instability through the interwar period. At which point things got worse, with Nazi occupation and a civil war which ended only in 1949 with the defeat of the Left. In effect, the Second World War lasted a full decade in Greece, one of the principal casualties. The post-war economic recovery in Western Europe passed Greece by and there was a military dictatorship as recently as 1974.
Greece joined the European Union in 1981, the country's first lucky break for generations. Unfortunately, the electorate promptly chose Andreas Papandreou's Pasok movement to lead the country.
Andreas Papandreou (father of George, a rather more sympathetic figure who led the recent Pasok government) proceeded to deconstruct the Greek economy in real time, presiding over an orgy of mismanagement and corruption which at times threatened the re-emergence of an authoritarian regime.
Pasok's principal opponents, the centre-right New Democracy party, also served undistinguished spells in government, marked by cronyism and corruption. The result has been the loss of public confidence in the country's two main political movements and the emergence of extreme populism, political fragmentation and xenophobia.
Greece never met the requirements for eurozone membership. The debt and deficit figures were fiddled. In fiddling the figures, it should be conceded, Greece was following the example of its supposed betters.
In the rush to get the common currency up and running, the famous convergence criteria for eurozone entry laid down at Maastricht were satisfied in several countries through the deployment of creative-accounting stunts that would get a private company into trouble with the law.
When it emerged that Greece was insolvent early in 2010, the EU botched the first Greek bailout. There should have been a substantial debt write-down straight away, a strategy apparently advocated by IMF officials, who were conscious of the need to provide the borrowing state with sight of the winning post and a decent prospect of exit from financial distress.
Predictably, the political task demanded of the Greek leadership proved impossible, despite a greater effort than they have been given credit for. The second bailout has clearly also been botched.
Financial crashes invariably create extra costs when their scale is underestimated and there is a reluctance to face the music. Shouldering big costs up front tends to be the cheapest option. The depressing failure to learn this lesson has been illustrated again this weak with the collapse in the Spanish and Italian bond markets, which were supposed to be reassured by the provision of European bank-rescue funds to the Spanish government.
The emergence of a rejectionist government in Greece is likely to see an intensified run on deposits in its banking system and a refusal by the ECB to provide replacement liquidity. The ECB has already stretched the rules and will lose all credibility if there is further slippage to accommodate a country in the process of rejecting bailout terms on which the ink is barely dry. Greece has, after all, received a gift of €100bn from the private holders of its sovereign bonds.
Alternatively, or perhaps in tandem, the official lenders will decline to release further tranches of the funds offered under the revised bailout, whereupon Greece defaults again and departs the euro. All of this could play out over a timetable of weeks rather than months, with the European priority being the maintenance of firewalls around Spain and Italy, for whom sovereign bailouts are outside the financial resources available. If Spain loses access to the bond market, so will Italy and the game is up.
The European core will move might and main to prevent this from happening. What, then, is the benefit of permitting a chaotic Greek exit? Aside from reinforcing the already strong incentives for the other distressed countries to stick with their programmes, it is difficult to see any at all.
A Greek exit would signal the first actual concrete piece of disintegration in Europe since 1958 when the Common Market commenced with just six members. Like all the Balkan countries, Greece sees itself as surrounded by hostile neighbours, with whom it shares ambitions to recover territory which cannot be entertained, never mind satisfied.
The extension of the European political system from the original six into the current 27 represents the greatest achievement of post-war European statecraft but is now threatened by the least impressive -- the premature and botched currency union.
It is fashionable to bracket Greece with Portugal, Spain and Italy as mediterranean countries, the 'Club Med', sharing sunshine and a relaxed approach to economic management. But Greece is a Balkan country, beset with difficult historical legacies, including a dysfunctional political system.
Slovenia is the only successor state of the former Yugoslavia to have transited into the EU (and the eurozone), to be followed next year by Croatia. Both are Catholic, rather than Orthodox, and former components of the Austro-Hungarian empire. Both, in other words, are culturally closer to Europe and less exposed to the perils of a dangerous neighbourhood.
The EU enlargement project has brought the promise of stability and better government to most of the ex-communist countries and to south-eastern Europe. Even if Greece survives in the EU, having exited the single currency, great damage will have been done to the propagation from the richer to the poorer parts of the continent of political hope and solidarity.
It is too easy today to blame Greece for the manifest failings of its political system. Europe has failed Greece too, in the inadequate policing of the misgovernment of recent decades, in the admission of Greece to a misconceived common currency to which it was patently unfitted, and in the inept bailouts when the chickens came home to roost. One should fear for Greece this morning. This is not just about economics.
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