I've been steering clear of the euro crisis for the past month or so, but given the latest frenzied spate of negotiations about how to prevent Greece from defaulting on its debt, I figured it was time to jump back in. The latest news is pretty straightforward: over the weekend, the Greek parliament voted to accept a new set of austerity measures, in exchange for a new round of bailout money — $171 billion, roughly.
This hasn't gone down well with the population, according the the New York Times:
[C]haos on the streets of Athens, where more than 80,000 people turned out to protest on Sunday, and in other cities across Greece reflected a growing dread — certainly among Greeks, but also among economists and perhaps even European officials — that the sharp belt-tightening and the bailout money it brings will still not be enough to keep the country from going over a precipice.
Angry protesters in the capital threw rocks at the police, who fired back with tear gas. After nightfall, demonstrators threw Molotov cocktails, setting fire to more than 40 buildings, including a historic theater in downtown Athens, the worst damage in the city since May 2010, when three people were killed when protesters firebombed a bank. There were clashes in Salonika in the north, Patra in the west, Volos in central Greece, and on the islands of Crete and Corfu.
Greece and its foreign lenders are locked in a dangerous brinkmanship over the future of the nation and the euro. Until recently, a Greek default and exit from the euro zone was seen as unthinkable. [my emphasis] Now, though experts say that the European Union is not prepared for a default and does not want one, the dynamic has shifted from trying to save Greece to trying to contain the damage if it turns out to be unsalvageable.
I'm almost ready to say that a Greek default and euro exit, far from "unthinkable," is now inevitiable. There's even a catchy term for it: "Grexit." We've already seen a series of what might be referred to as "financial coup d'etat" in southern Europe, with the elected leaders of Greece, Italy, and Spain all sequentially replaced by so-called "technocrats" — a nice word for a politician whose job it is to support the kind of radical budget cuts and deficit-reduction goals that will preserve the euro. In practice, of course, this means accepting a loss of sovereignty. Greece, for example, would become what the economist Peter Morici has called a "German protectorate" (he's not fan of the way that Germany has been running this show).
The alternative for the Greeks is to...well, be Greek and accept that a euro exit will reverse the decades of progress (mostly political — the economy still isn't particularly strong) that membership in the single-currency enabled. Tough choice, obviously. But Onerous Bailout 2 isn't necessarily going to avert the country's ultimate fate: the crisis will again be temporarily averted, but Greece's economy still won't grow enough to bring debt-to-GDP ratio down to reasonable levels by 2020. Right now, debt is 160 percent of GDP — and the level of GDP itself is below $400 billion. It's optimistic to think that it can be driven down to 120 percent of GDP by 2020.
You do have to worry that if Greece does default, then Portugal, Spain, and Italy could follow, like falling dominoes. This is the "Lehman Brothers" event that observers often speak of, evoking the U.S. government's decision to allow the investment bank to go under, which set off the chain reaction that led to the financial crisis. The difference is that there isn't enough money in the system to bail out all of southern Europe and possibly France, too. Essentially, this is why the crisis keeps circling back the scene of the original crime, Greece.
However, in terms of exposure to a potential Greek default, the other countries of Europe have at least had enough time now to insulate their banks. Lehman happened in a matter of months. Greece has been collapsing for years. So the wider banking crisis isn't as much of an issue. This is now a public debt crisis, whereas previously it had been a public-private debt mashup.
This has been going on forever, but that might be a good thing — and an opportunity for Greece. Sadly, it doesn't look as if the country is going to seize it. The vote over the weekend proved that the leadership is allied with the German protectorate/save the euro strategy. But ironically, this means that Greece is Germany's problem now more than ever. That's the price Germany is paying for not stepping up and solving this problem two years ago — after all, everyone knew that the euro would be threatened if economically weaker countries used low borrowing costs to live large, as Greece did.
So really, the euro has already failed. And what was farce is now precariously close to descending into folly.