European institutions appear weak and incapable of defending European principles and the proper functioning of the euro.
Greece is on the verge of balking on billions of Euro it has borrowed.
If they do it will trigger a free for all and the end of the Euro.
The euro is seen as the ultimate underpinning for the edifice of European integration. The financial crisis and its aftermath have shown that the euro instead has the potential to destroy the whole project.
Political reform is needed to sustain the euro but this is unlikely to pass the political feasibility test with the current governments of Europe. At present the European Union is a club with virtually no economic union: no fiscal union, no banking union, no shared economic governance institutions, and no meaningful coordination of structural economic policies.
The Greek crisis will pitted debtors against creditors.
Not with standing the deep interdependence between them Debtor countries want salvation through solidarity and are thus committed to policy solutions that distribute the costs beyond their borders. Creditor countries, on the other hand, want to insulate their tax payers from exposure to the debtor states and are reluctant to discuss large-scale burden-sharing.
We all know that Greece cooked the books to join the euro in the first place. However, France and Germany also broke the very rules that they had insisted on for everyone else. In 2004, Greece announced it had lied to get around the Maastricht Criteria. Surprisingly, the EU imposed no sanctions! Why not?
Because the EU wanted to strengthen, not weaken, the power of the euro in international currency markets. A strong euro would convince other EU countries, like the UK, Denmark, and Sweden, to adopt the euro.
Greece has been a chief benefactor of the EU budget; Since 2009, Greece has been kept on life support by two bailouts from the European Union, European Central Bank and International Monetary Fund worth a total of €240 billion ($320 billion).
In 2009, EU transactions summed up to 2.35% of GDP. From 1994-99, about $20 billion in EU structural funds and Greece federal financing were exhausted on projects to urbanize and build up Greece’s transportation system in time for the Olympics in 2004.
Would a Greek default plunge the world into a financial crisis? No. It prove systemic for the EU as a whole.
Greece, Ireland and Portugal, are already in their fourth year of austerity, face many difficult years ahead, as do states with high levels of debt.
If the single currency survives, it will survive on the basis of more integration within the euro area as the ‘hardest of hard cores’ and hence deep divisions between the ‘ins’ and ‘outs’.
There is also the deeper question of the consent of the people. If the euro area reaches a federal moment and a federal question, then the consent of Europe’s peoples must be sought at least within the euro area.
Without it the currency the European Union as we know it would not be sustainable in the longer term.
Whether an exit for Greece can be achieved without triggering a massive financial crisis is doubtful. The result will be a disorderly collapse of the euro and probably of the single market as well.
The result of a Greek walk away would be substantial losses for established governing parties and more electoral success for extreme populist parties and National elections remain the most legitimate channel for selecting political office holders in Europe. European parliament elections are second order political events.
Next in line would be Italy: It is too big to fail and too big to bail.
Greece’s creditors must accept the necessity of a write-off of at least a portion of Greek debt. The current practice of extending the terms of Greek loans and pretending that Greek will – some day – make good on its commitments cannot be sustained.
A Greek default would have a more immediate effect. First, Greek banks — already on the brink — would go bankrupt. Next, losses would threaten the solvency of other European banks, particularly in Germany and France. Even worse, the EU’s central bank (ECB) holds a lot of Greek and other sovereign debt. If Greece defaults, it could put the future of the ECB at risk. Other indebted countries might decide, or be forced, to default. Without a central bank to bail them out, the EU itself may not survive.
The crisis requires collective action from the ECB and the 17 member states in an environment of deep divergence of preferences and interests.
Make no mistake: this is going to end badly. By this time next year, either Greece will be out of the euro – or Syriza will be out of power.
Luckily I have thought of a solution.
Why not give the Greeks a huge pile of imaginary Quantitative Easing Money. Then they can give this imaginary money back to pay off their debts.
Abracadabra the Euro is saved.