This past week was quite interesting, as well as volatile. On Monday, we had a huge gap up right int...
Why the European summit "failed" and why failure offered the best chance to keep Greece in the euro
05/24/2012 2:09 pm EST
European leaders meeting yesterday faced a tough choice.
No. 1. They could either put together a package of growth measures now that might give Greece (and Spain and Italy and…) some reason to hope that it didn’t face an endless course of austerity medicine.
No. 2. They could opt to do nothing except hold Greece’s feet to the fire by repeating over and over again that the country must honor its bailout deal.
The summit wound up opting for No. 2, partly because doing nothing is always easier than banging heads together in order to do something, but mostly because of Greek politics.
European leaders know that as big a deal as the June 17 Greek election is, the really tough test will come when a new Greek government will face having to cut another 10 to 15 billion euros from the Greek budget before the end of the June in order to keep to the bailout deal.
The decision to do nothing represents the best guess among Europe’s political leaders of how to manage that post-election scenario in order to maximize the very slim chance that Greece will stay in the euro.
Here’s the problem posed by the Greek election and its aftermath.
If a coalition of “no to the bailout deal” wins, and refuses to make the cuts required by the deal, Greece is headed out of the euro relatively quickly. In the face of a direct challenge like this the International Monetary Fund and the European Central Bank would find it just about impossible to turn over the next cash payment from the bailout fund. And without that money Greece is broke in August.
The best way to head off a victory by Syriza and its “no to the deal” allies, the thinking seems to run in Germany and other hard-line governments, is to play hardball so that Greeks treat the June 17 vote as a referendum on the euro. (There is, of course, the chance that Syriza leader Alexis Tsipras doesn’t want to win the vote or would refuse to form a government on the logic that any Greek government that did impose another round of austerity wouldn’t last very long and Syriza would do even better in the next election.)
If a coalition headed by New Democracy and other parties that say they’re committed to the euro (and to finding a way to keep the bailout deal) wins, that government would face a huge problem. Another 10 billion in austerity cuts would bring even more Greeks into the streets. The country might indeed become ungovernable. The government might fall almost immediately. And Greece would be headed out of the euro in August anyway.
What could prevent the failure of a “live up to the deal” government?
Well, the bigger a growth package European leaders could deliver to that government after the election (especially if it included some flexibility on when Greece had to meet the bailout deal benchmarks), the more political capital European leaders would deliver to that Greek government. Think of the difference between standing in front of the Greek parliament to say, “We have no choice but to obey our creditors” and standing in front of the Greek parliament to say, “Yes, we have to take the pain but this government has also been able to deliver a package of hope.”
The odds aren’t especially good that New Democracy and its allies can win the June 17 election, or actually form a coalition government, or survive the post-election austerity deadlines. But delaying any growth package until after the June election so that a new Greek government could get credit for delivering it, is about the best that anybody can do to improve the chance that Greece will stay in the euro past August.
After August, I think the Greek economy sinks ever deeper in to recession, the country cannot meet even looser austerity demands, and it heads out of the euro anyway.
But the preferred method in this crisis has been to kick the can down the road, and I think non-action at this summit fits that bias.
Next up the Greek elections on June 17 and then another European summit at the end of the month, dedicated to developing a growth package.
Hope you weren’t expecting this crisis to go away soon.
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