It appears almost certain that Greece will have to exit the Euro. What is most uncertain is the domino effect this will have on the rest of the Eurozone.
The cost of borrowing for the Spanish government shot up again today. Ten year bond yields are above 6 percent, the economy is contracting, the banks are exposed to colossal debt, unemployment is above 25 percent and the government are introducing radical cuts in public spending. It is almost certain that Spain will join Greece, Ireland and Portugal into the ECB-IMF ‘bailout’ program. This will exhaust the funds of the European Stability Mechanism, and put unforeseen political pressure on the Euro.
Spain might opt to request direct non-market financial support before the Greek elections on June 17th. The outcome of these elections is sure to see a rise in electoral support for SYRIZA. This is a broad left wing party made up of Euro-socialists in favor of rejecting the ECB-IMF bailout program (and its condition of austerity) but retaining the Euro. Merkel and the EU Commission see these policy demands as mutual incompatible. A Greek exit from the Euro will ultimately be decided by a Greek government. SYRIZA might well adopt this strategy if they secure a stable government. This, however, is unlikely. The knock on effect across Europe, particularly in Ireland, Portugal and Italy, in the context of Spain losing access to finance markets, is highly unpredictable.
At this stage it is not unlikely that Germany will seriously consider its future in the Eurozone. The CDU just lost an election in the Nordrhein-Westfalen region to the a social democratic/green coalition. This is a region larger than most small EU countries, with a population of 18 million. It is also the powerhouse of German industry. From this region, the EU steel and and coal community was established, evolving into the European Community, and the Eurozone currency itself. Merkel’s primary concern are the 2013 German elections. If she wins, and secures 5 more years in office, she may well decide that a German exit from the Euro is the best strategy to deal with the Eurozone crisis.
The outcome would be a break up of the Eurozone and a return to competing nation-states and national currencies. But it would also mean that citizens have some capacity to take control over the democratic sovereign state. History has shown that this can often lead to perverse right wing outcomes, rather than progressive socialist ones. Therefore, we cannot predict the outcome of a return to national currencies (and by default, more autonomous fiscal policies and an ability to devalue currencies). Nor can we be sure that nation-states could issue debt to finance expenditure again. Those with savings would lose big time. Those without would probably do better. It would enable a process of wage rises, inflation, increased demand and a general pick up in money-circulation. But it does not mean peoples living standards will increase.
The alternative of a return to the nation-state, and national currencies is that European political leaders mandate the ECB to start printing money, issue Euro-bonds and push for fiscal federalism across the EU. A Greek exit might actually increase this possibility, as it will become increasingly obvious to the ECB that they will lose a fortune unless the debt is socialized across the richer states of Europe. But the political will to push for this ‘United States of Europe’ does not exist. If one examines the Eurozone as a whole, it is in relatively good shape. It has a balanced current account, a manageable fiscal deficit, and moderate level of debt. Europe’s problems are internal to nation-states, lacking federal support. Therefore, economically speaking, it makes ‘technical sense’ to push for greater European integration and encourage cross-national transfers and investment. The question is whether it can be democratically legitimate.
We need a robust ideological confrontation between competing policy choices, at national and EU level, to decide the future direction of Europe and its diverse nation-states. At the core of this strategy should be European wide solidarity with countries in financial difficulty. If Greece decides to organise an orderly exit from the Euro, to secure a decent standard of living for its citizens, it should be supported by European institutions to do so.