Contagion of Greek tragedy

Economic austerity across Europe is causing social instability. According to an old adage, when America sneezes, Europe catches a cold. While the Americans have landed an uneasy respite from their sovereign debt crisis, Europe is still suffering from the fallout of the financial crisis beginning with the fall of Lehman Brothers and Bear Stearns in 2008. The eurozone, now in its tenth year, was established to ensure financial stability through collective regional rather than separate national efforts. The basic idea was that countries like Greece and Portugal, which had lower bond ratings, should be able to borrow on somewhat the same terms as larger economies like Germany and France. This would, it was hoped, enable them to invest in infrastructure of growth and thus contribute to the overall stability of the eurozone. Higher economic growth was expected to generate enough revenue to pay back the loans. This, however, was not to be. Starting with Greece, government bonds were issued to finance irresponsible spending. With no fiscal space to service its debt that had overtaken the size of the economy, by a wide margin, the country needed to borrow more. Lenders demanded interest rates that the country could ill-afford. Not only that, premiums were required to hold existing bonds. The European Central Bank (ECB) and the IMF had to step in to bail out the Greek economy. Strict austerity regimes imposed in the process cut not only fat but also muscle. Growth collapsed. Cuts in social spending and rising unemployment have led to violent protests.

The initial European response was to dismiss the Greek debt crisis as a small aberration, given that it has a mere two per cent share of the ailing economy in the total eurozone output. But the contagion of this Greek tragedy spread quickly to fellow PIIGS (Portugal, Italy, Ireland, Greece, Spain). In Europe, these economies have always been known for their cavalier attitude towards financial stability. Since there is an incomplete understanding of the complex web of exposure by banks across Europe, the incidence of the contagion may be more than meets the eye. There is a serious gap between the quick-response stipulations of a monetary union and the slow political decision-making at the level of the European Union. The interim European Financial Stability Facility is yet to become a permanent European Stability Mechanism. Nobel Laureate Joseph Stiglitz also talked of a lack of will to support the weak economies. With the exit of Dominique Strauss-Kahn, The IMF’s ‘New Arrangements to Borrow’ to bail out Europe in distress is taking time to shape up. Germany and France, the strongest economies of the eurozone, are already feeling the heat. The head of the ECB has warned that the future of the European Union depends on the survival of the eurozone. There are suggestions that Germany would be better off quitting the Eurozone or perhaps regroup with other surplus countries, mostly Scandanavian. Many economists doubt whether the eurozone fulfils the conditions of an optimal currency area at all.

Whether it is the odious European loans described in the Greek documentary ‘Debtocracy’ or an Anglo-Saxon ‘conspiracy’ against the eurozone abetted by their media, speculators and rating agencies, one cannot say. But a Greek tragedy has been staged: the European dream of standing up to the dollar and its eventual replacement by the euro stands shattered.

Published in The Express Tribune, August 12^th, 2011.