As the interest rates on Greek government two year bonds reaches an eye-watering, sub-prime credit card level of 26.65% (according to Bloomberg) the debate has moved from ‘if’ the Greeks default, to when they default, and how they default.
In an excellent article by John Lanchester in the London Review of Books, he describes the various kinds of default that might be done to or by Greece. They range from a voluntary rollover, to a complete rug pulled from under the carpet affair (bank asset freezes and all savings etc effectively devalued). I hate to say that the naysaying Eurosceptics who fought so hard to keep the UK out of the euro as it approached in the 90s were right, in retrospect. Their arguments were total horseplop, of course: the euro makes perfect sense for a trading area, providing the people who police entry to and membership of the currency aren’t complete morons. And that’ll be the bit that went wrong. By most sensible accounts Greece, Italy and Belgium should have never been allowed to enter (on the original criteria), and now it is Greece and Italy who are causing the most strife to the single currency area.
In terms of problems in the room (and according to Eurostat) the Greeks and Italians have a public sector debt at over 100% of GDP (which is panic stations time), then comes in the 80-99% of GDP range, Portugal, the UK, Belgium, Ireland, Germany, France and Hungary. Weirdly, given that Spain is being talked about as the next country in crisis, it sits on a nearly sensible 60%, with all of those ‘money-sucking’ eastern Europeans on very low levels of public debt. They’re due quite a large apology from their fiscally irresponsible neighbours in the west, some of whom make Zimbabwe look like the Chicago school of financial responsibility.
So, some selected impacts:
On the street level, and in the worst affected countries, the poor will get a bit poorer and their lives will be proportionately more miserable.
The squeezed middle will be further squeezed and the credit freedom of 1997-2008 will be the sort of thing we report to our grandchildren with a misty look in our eye.. for my generation, we were told about the 1950s in a similar tone.
The rich will always be rich.
There is an uneven topography of banking grief that will fan out across Europe. The determinants will be who has lent to who (and there are distinct variations on country to country lending, based on banking activity). This accounts for why the Germans are just so exercised about the prospective Greek default, even though it amounts to 3% of European GDP. Frankfurt could just write a cheque for the Greek economy and be grumpy about it for the next twenty years. If Ireland went bust, the UK would be in trouble, as another example. But this may impact on the commercial banks we all use, and then on our governments as they prop up our consumer accounts. The contagion effect runs wide and unpredictably here.
When it all unwinds, the Euro will probably have been fatally undermined as a currency. So the only prospect for a regional currency will be if Germany teams up with the stable and responsible Eastern European countries.
And when the currency unwinds, so might the EU as a political entity. With a central plank of the EU blasted out, the momentum against the EU continuing in its existing form would be immense. This raises interesting questions about the resumption of bilateral relations, how to unpick the EU’s influence out of the world etc etc.
In our sphere, the Libyan adventure can be read (partly) as the Europeans coming to terms with, or trying to get their head around making a critical difference without the overwhelming presence of the Americans. And that is fine, as it goes, but if the currency collapses with additional pressures placed on national budgets the coming to terms with an exposed role, might be dwarfed by their being no money left in the bank. In a total reversal of fortune, the so-called ‘soft-power’ and influence of the Europeans in the world would also be turned upside down. Without that financial clout (in the absence of military clout) it might turn to India, Brazil and of course China to fill in the gap.
Ultimately though, the EU should be about creating a competitive stance that all us Europeans can benefit from (be it high end technology or economics or.. ). And a competitive stance is all about being one generation ahead of international competitors (and friends). But we’re not talking about the EU’s competitive stance, or anything like it. We’re talking about its survival. And if you start talking about something’s survival, you’re probably thinking about its demise.