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Greek Tragedy: LITMUS TEST FOR EU, By Amrita Banerjee, 8 July, 2015 Print E-mail

Round The World

New Delhi, 8 July 2015

Greek Tragedy


By Amrita Banerjee

(School of International Studies, JNU, New Delhi)


The question of how to save Greece, debated for over five years, has been European Union’s recurring nightmare. The problem this time is more acute after the country’s citizens voted to reject the terms of a new bailout by the international creditors, Greece is now veering closer to leaving the 19-nation eurozone and abandoning the shared currency, a move that could destabilize the region and reverberate around the globe.


A flashback to the Eurozone Crisis reveals that Greece became the epicentre of Europe’s debt crisis after a decade of overspending especially after Wall Street imploded in 2008. With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances. Suddenly, Greece was shut out from borrowing in the financial markets. By the spring of 2010, it was veering toward bankruptcy, which threatened to set off a new financial crisis.


To avert calamity, the so-called troika — the International Monetary Fund, the European Central Bank and the European Commission — issued the first of two international bailouts for Greece, which would eventually total more than 240 billion euros, or about $264 billion at today’s exchange rates. Greece defaulted on repayment of Euro 1.6 billion to IMF on 30th June; another payment of Euro 4.5 billion is due on the 13th July.


The bailouts were given with strict austerity measures and conditions. Lenders imposed harsh austerity terms, requiring deep budget cuts and steep tax increases. They also required Greece to overhaul its economy by streamlining the government, ending tax evasion and making Greece an easier place to do business.The money was supposed to buy Greece time to stabilize its finances and quell market fears that the euro union itself could break up. While it has helped, Greece’s economic problems haven’t gone away.


Today, Greece faces emergency in four aspects. First, the Sovereign Debt Crisis -- the money owed by the Greek government to international/european lenders. Second, the Banking Crisis – huge capital outflows has left very little with banks. Third, the Capital Outflows – more and more money exiting Greece everyday and lastly Negative Trade Balance – tourism industry is severely hit which was the main source of Euros and Forex.


The economy has shrunk by a quarter in five years, and unemployment is above 25 percent. It is so because the bailout money mainly goes toward paying off Greece’s international loans, rather than making its way into the economy. And the government still has a staggering debt load that it cannot begin to pay down unless a recovery takes hold.


Many economists and Greeks, blame the austerity measures for much of the country’s continuing problems. The leftist Syriza party rode to power in January this year promising to renegotiate the bailout; Prime Minister Tsipras said that austerity had created a ‘humanitarian crisis’ in Greece. But the country’s exasperated creditors, especially Germany, blame Athens for failing to conduct the economic overhauls required under its bailout agreement. They don’t want to change the rules for Greece.


As the debate rages, the only thing everyone agrees on is that Greece is yet again running out of money — and fast. The government last week missed a critical debt payment to the IMF, and its banks have been forced to close. And on Sunday, the anti-austerity government in Athens scored a decisive victory as voters by an astounding 61% backed its call to reject a compromise with international creditors in a referendum, raising serious doubts about the country’s ability to remain inside the eurozone.


By giving a strong verdict through the referendum, Athens has answered that it wants to chart its own course.Even though this verdict will strengthen Syriza at the negotiating table, the party would have the burden of navigating the country through what’s likely to be a painful financial and human crisis. The gamble will shape the economy of this nation of 11 million for more than a generation.


Now coming to the question of what impact a ‘Grexit’ would have in EU considering the fact that the Greece economy is only about 2 percent of the euro zone's total. One school of thought says that Europe has put up safeguards to limit the so-called financial contagion, in an effort to keep the problems from spreading to other countries. Greece, just a tiny part of the eurozone economy, could regain financial autonomy and thus the eurozone would actually be better off without a country that seems to constantly need its neighbours’ support.


The other school of thought says that despite the frustration of endless negotiations, European political leaders see a united Europe as an imperative. At the same time, they still haven’t fixed some of the biggest shortcomings of the eurozone’s structure by creating a more federal-style system of transferring money as needed among members — the way the US does among its various States.


Further, exiting euro zone would involve a legal minefield that no country has yet ventured to cross. There are also no provisions for departure, voluntary or forced, from the euro currency union. Moreover, ‘Grexit’ would embolden anti-austerity parties in the rest of the continent by showing that they have nothing to lose but their fiscal chains by challenging the continent's budget-cutting orthodoxy.


The economic crisis in Greece is a manifestation of a political failure across the EU. The IMF and Germany’s response to this crisis raises profound questions about the existence of European Union as a union. Germany fears that there are other vulnerable (but better) economies (Portugal, Italy, Ireland, Spain) and any relaxation to Greece will lure these countries to follow the suit.The absence of a principle of internal safety net for an imploding economy, and the failure of the EU’s more developed nations, especially Germany, to provide such a safety net to a less developed one like Greece has brought the EU to the brink of unravelling.


But this crisis is not just about sovereign default. In fact, it is about the future of Europe.Two exogenous factors have come to shape the Western response to an unfolding Greek tragedy. First, the rise of Germany as a geoeconomic power and second the return of Russia as a geopolitical player. Over the years, a more economically successful and prosperous Germany has asserted itself, projecting its post-war ‘geoeconomic’ power to acquire political influence. Second, the induction into the EU of several east and north European economies worried about the resurgence of Russia as a geopolitical player.


In this regard, economic crises do have geopolitical consequences. The European financial crisis will consolidate German, and perhaps Russian, power in Europe as a similar analogy can be drawn from the Asian financial crisis of the 90’s when itconsolidated the Chinese power in Asia. The crisis in Europe is a test for Washington too. Having fathered the post-war trans-Atlantic order, the US is unable or unwilling to step in and preserve the EU in its present form. To end, one can just say that the Greece financial tragedy raises important questions about the strength of a globalised economy and in this regard, this crisis is a litmus test for the world at large. --- INFA


(Copyright, India News and  Feature Alliance)

















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