The stand-off that may sink the euro

The euro has become the prisoner of a playground game of “you-go-first”. Everyone — almost — knows what needs to be done, even if some resile from admitting it. The necessary ingredients are growth, competitiveness and sustainable debt and deficits. The missing glue is trust.

Governments will act only if they are sure those on the other side of the creditor/debtor line will do the same. As in the school playground, each insists the other must jump first. The result is policy paralysis and the rise of populism.


A sensible European policy maker would see the election success of Greece’s Syriza as a wake-up call rather than a nightmare. Not because the radical leftist government of Alexis Tsipras is correct in most of its prescriptions (though neither is it invariably wrong), but because its victory crystallises the impasse that hascrippled the eurozone.

Not so long ago governments confounded the gloomsters by summoning up the political will needed to keep the single currency on the road. Compromises were made on all sides. Berlin, though it could never say so, abandoned its opposition to bailouts; the peripheral economies accepted a harsh mix of austerity and structural reforms.

Resuscitating the euro is one thing; rejuvenating it is proving a lot tougher. The passing of the immediate crisis has sapped the will to act. Mario Draghi, the president of the European Central Bank, has been heroic in his efforts to buy time, most recently through pumping even more cheap money into the eurozone economy. In national capitals, though, resolve has curdled into mutual resentments. Syriza represents a collision between austerity and democracy. This may be the first of many.

In some respects, Greece is sui generis. You do not have to be a wild leftie to see that so large are its debts that they cannot be completely repaid and that never-ending austerity is not an answer. However it is dressed up — longer maturities, interest rate cuts or write-offs — Athens needs debt forgiveness. Pretending otherwise does nothing to advance the interests of creditors.


Greece’s problems, though, have always been as much political as economic. While others saw in the EU the opportunity to modernise, the ruling class in Athens simply pocketed the cash. Above all else, Greece needs half-honest government. The rest of the eurozone should be applauding Mr Tsipras’s promise to stamp out corruption and to collect more of the taxes.

Syriza goes wrong when it suggests that the route back to economic growth is to spend more on consumer subsidies and public sector workers. Clientelism and outright corruption has been the bane of Greek politics since the demise of colonels in 1974. Mr Tsipras too often sounds as if the far left now wants nothing more than to take its turn at distributing the spoils of office.

On the other side of the line, Germany’s Angela Merkel is not the pantomime villain of populist, and increasingly, popular myth. The chancellor is right when she says that the eurozone can survive long term only if weak economies improve their competitiveness, and rein in deficits and debts.

What grates is Berlin’s moralising tone. What deeply disappoints is the chancellor’s obsessive regard for short-term swings of domestic public opinion. Ms Merkel is Europe’s most powerful politician; domestically she has no rivals to speak of. She can afford to spend some of the capital accumulated over three successive election victories. Sometimes leaders have to make the political weather. She should look to Helmut Kohl, her predecessor-but-one.

Instead she combines tactical pragmatism with strategic myopia. Ms Merkel has said more than once that the failure of the euro would put in doubt the entire postwar European order. Given Russia’s armed aggression in Ukraine and its growing interference elsewhere in Europe, that would be a calamity beyond imagination. So, yes, the euro has a future only if weak governments get the economics right, but ratchet up the pressure too much and there will be no currency to save.

Greece should not be given a free pass, but the lesson of the post-crisis years has been that governments can go only so far in cutting budgets and improving competitiveness when their economies are shrinking and living standards are in free fall.

Austerity-driven growth was always a fraudulent prospectus. Now the populists threaten to make it impossible for debtors to embark on even calibrated fiscal retrenchment. Syriza’ s victory will embolden the far right as much as the far left, the xenophobic National Front in France as well as Spain’s leftist Podemos party. What will Ms Merkel say if enforced austerity and economic decline catapult Marine Le Pen into the Elysée Palace in a couple of years? The euro depends on political consent as well as fiscal discipline.

For its part, Greece must decide its future. Does it want to be a modern European democracy or would it prefer to rejoin the Balkans as another client of Vladimir Putin’s Russia ? It is not yet clear where Syriza stands on this though its apparent closeness to the Kremlin is not encouraging.

The bargain to guarantee a future for the euro has not changed since the start of the crisis: more growth-friendly structural reform in debt-burdened nations in return for an easing of the eurozone’s fiscal straitjacket by Germany and others. As for who should go first, well, that is easy: both.




Philip Stephens




Fonte: FT