Greek default and the end of the Eurozone?

A Greek default is looking more and more likely - if it happens, what will be the consequences for the Eurozone, economically and socially? By Paul Murphy, MEP.

A spectre haunts Europe – the spectre of a default by Greece, Greece's subsequent exit from the eurozone and a break up of the eurozone. All the signs – economically and politically – are that key sections of the European establishment are increasingly coming to the realisation that this is now a real possibility.

In the markets, the writing is on the wall for Greece and the euro. The markets (made up of banks, pension funds and super-rich speculators in the main) are pricing in a risk of default for Greece of 98%. Meanwhile, the price of gold has risen to a record level of $1,900 - an increase of almost 41% over the course of the year, after rising steadily and consistently since the beginning of the crisis. The Swiss franc has seen such an influx of funding, in particular from former-euro holders – that it shot up in value and the government was forced to announce a currency ceiling above which the central bank will print Swiss francs to buy euros with. The rising price of gold and Swiss francs is important because it illustrates the crisis of confidence in the world’s major economies and in particular in the euro.

Politically, tensions are rising on an almost daily basis as the speed of the Eurozone crisis increases further. In particular, the past month has seen a whole series of prominent members of the northern European capitalist establishment express their doubts about the Eurozone. The former head of the Federation of German Industries (the equivalent of Ireland's IBEC) argued for “Austria, Finland, Germany and the Netherlands to leave the eurozone and create a new currency leaving the euro where it is.” The German economics minister and chair of the Free Democratic Party, Philipp Roesler, together with the head of another German establishment party in government, the CSU, have raised the prospect of default by Greece and exit from the eurozone. In addition, the Dutch Prime Minister and Foreign Minister called for the ability to expel countries from the Eurozone.

Although this attitude still doesn't represent the majority opinion of the northern European capitalist class, as seen by Chancellor Merkel's angry response to the undisciplined talk of her counterparts in government and declaration that “if the euro fails, then Europe fails” – it does illustrate the declining room for manoeuvre for the capitalist class and their political representatives. While the majority of the capitalist class in Germany, for example, is committed to the euro, as it has facilitated a growth of German exports, that commitment has a limit – a limit that is fast approaching. They are also  experiencing the consequences of their xenophobic campaigns against “Greek laziness” – with a public that is more and more resistant to further “bailouts”. The result is that while they are still committed in theory to the euro, they are unlikely to be able to resist the pressures pushing towards a break-up.

This mirrors the problems facing the establishment in Greece. In recent days, Greek Prime Minister Papandreou has reportedly been considering organising a referendum on remaining in the eurozone. This would be an extremely risky attempt to shore-up support, as a result of the increasing awareness of the difficulty that the establishment has in implementing the austerity demanded by the EU and the IMF. This is because of the mass opposition in Greek society, major street protests and in particular the industrial unrest that it is facing, with another general strike now called for 19 October.

Establishment response to crisis

These economic and political tensions have arisen because the approach of the European establishment to ‘saving’ the euro has failed. It has amounted to repeated fire-fighting in response to the demands of the markets, fundamentally to protect the interests of the banks. The playbook for the troika of the European Commission, the ECB and the IMF has been repeated for Greece, Ireland and Portugal. It amounts to a “bailout” (read: loan at punitive interest rates) plus vicious austerity for working people plus a guarantee that the bondholders are paid back. The results in all of the economies have been depressingly familiar – a deflationary downward spiral along with a worsening of the economic crisis. It is little wonder that the space between emergency conferences and conference calls has shortened over the course of the crisis, until now they seem to be an almost weekly occurrence. It is a mark of the dramatic failure of their approach.

The debts for all three countries have therefore remained unsustainable. In partial recognition of this fact, a new deal was done with Greece on 21 July. This deal involved a certain minimal level of ‘burden sharing’ by the private sector, as well as a new loan for Greece. But the ink was barely dry on this new deal by the time that it became clear that neither the markets, nor anyone else who has followed the euro crisis, seriously bought it as anything more than another extremely small stop-gap measure. Why? Because Greek debt is still unsustainable – with the new deal, at best it will peak at 148% of GDP instead of 172% of GDP – an amount that is still impossible to sustain, particularly when the economy is collapsing as a result of the austerity being applied to it.

The crisis came to a new head after this second Greek ‘bailout’ because the markets turned their attentions to Spain and Italy. These face many of the same problems as the other so-called PIIGS countries. There is one vital difference however - while the funds in the European Financial Stability Facility (the ‘bailout’ funds) are sufficient to cover the debts of Greece, Portugal and Ireland, they are not enough to bail out the major economies of Spain and Italy. This realisation led to a new crisis. In response, the European Central Bank demanded severe austerity. In exchange, the ECB agreed to buy government bonds from Italy and Spain. While the borrowing costs fell in the aftermath of this decision, they have since risen inexorably back towards the level they were at before the ECB announcement. In addition, Italy was downgraded by Standard & Poor’s. It is clear that another crisis looms for both countries.

Yet more austerity for Greece

In recent weeks, with Greek bailout money quickly running out (the government is due to run out of money on 10 October), attention has turned back to Greece. In theory, the funding needed for this was agreed at the meeting on 21 July. However, the implementation of this agreement has proven difficult in every respect. The private sector has not ‘opted in’ to the extent that was wished; the government of Finland is seeking collateral for its portion of the loan; and the Greek government is deemed not to have implemented sufficient austerity by the troika. This is despite the fact that privatisation and massive attacks on working people have already been implemented such as cutting public sector wages by 20% and pensions by 20%.

The effects of that austerity are clear now – the economy contracted by 6.9% year-on-year in the second quarter of 2011. One of the results of this is the country has been less successful in bringing down the deficit than anticipated. Angered that insufficient austerity was being imposed, troika representatives walked out of a meeting with their Greek counterparts a few weeks ago. Since then, the Greek government has offered further austerity – with 30,000 public sector workers to lose their jobs, increases in income tax, a property tax being imposed on all households and privatization to be speeded up.

Exactly what happens next is not clear. It is probable that on the basis of the promised austerity, a deal will be done to lend Greece the funding and allow it to stumble on. However, it does not deal with the fundamental problems. Implementing this level of austerity when faced with mass opposition is a dangerous proposition for the capitalist class and they may be stopped in their tracks. Greece, together with Ireland, Portugal, Spain and Italy will be back in crisis-mode in a very short time.

Jumping hurdles at the last possible moment is a dangerous game. Relatively quickly, it is likely that the euro leaders will stumble and fall. The stop-gap solutions are running out – and the more fundamental problem with the euro is being posed very sharply.

Fundamental weakness in the Eurozone

Ultimately, what the whole crisis reflects is the impossibility of maintaining a monetary union without a fiscal and ultimately a political union in the long run. Instead of the ‘convergence’ between the weaker economies and the stronger economies that was promised at the launch of the Eurozone the reality has been the opposite. There has been further divergence between the weaker southern economies and the stronger northern economies. The result is that while for a period of time the Eurozone was able to get along on the basis of the stronger economies, in particular Germany, exporting to weaker economies, with those economies being able to buy on the basis of credit, that could only last so long, as major debts were built up. With the global economic crisis this came into sharp focus.

Now the choice before the European establishment is whether to move forward towards that fiscal union or face a messy break-up. Key sections of the European establishment would clearly like to move forward towards fiscal unity. A huge amount of discussion on the crisis in the European Parliament, and in the European Commission and Council is focused on this option. Elaborate plans for imposing austerity on working people in concert across Europe are being hatched – with states losing power to the Commission and Council who will ensure that this austerity is carried through. That is what the so-called “six pack” on economic governance is ultimately about (see an article I wrote about economic governance here.)

However, while key elements of the establishment strive in that direction, the crisis is demonstrating that they will not be able to achieve it. This is partly because the other side of fiscal unity is common responsibility for debt. Here, the fundamental opposition between the various capitalist classes in Europe has revealed itself clearly. Ultimately, it boils down to the fact that the German capitalist class is not willing to act as a financial backstop for other economies in Europe.

This is what the increasing discussion about Eurobonds is all about. While there are some other tactical moves left to the European establishment - such as increasing the size of the EFSF - it is increasingly clear that the only option likely to give a significant breathing space to the Eurozone is something akin to Eurobonds. What this plan means is that debt would no longer be Greek, Irish or German, it would be European debt, guaranteed by the Eurozone countries as a whole, that is, backed up by the strongest economies - in particular, Germany. European Commission President Barroso, who represents that striving for fiscal unity, has raised this option again in a speech to the European Parliament – which the markets temporarily welcomed with a brief jump upwards.

However, to any careful observer, it is clear that while the rhetoric of the German establishment around Eurobonds has moderated somewhat (from an outright ‘no’, to ‘a no, not now, maybe later’ position), Eurobonds for the full amount of the debt of the peripheral economies is simply not an option for them. The idea has been raised of Eurobonds covering up to the value of debt of 60% of the GDP of the country concerned and then national debt making up the rest. This would not have the required effect, as everyone knows that it is the last bit of debt that is problematic, rather than the first! The national debt would be subject to speculation, with the markets gambling against the peripheral economies again.

So in effect the road forward to fiscal unity is blocked by the opposition between the capitalist classes in Europe as well as the mass opposition that faces attempts to implement austerity. Therefore, the only way is backwards, towards a break-up of the euro. That does not mean that the euro just comes apart, today or tomorrow. Establishments in Europe, such as the Irish establishment as well as the more core euro countries, are massively invested in this project. However, it seems likely that the logic of events will force Greece out of the euro, and the likelihood is that other countries will follow sooner or later.

The reason for this logic is that default for Greece is coming closer and closer. If Greece defaults without implementing socialist policies - such as a full nationalisation of the banking system and capital controls to prevent an outward flood of capital - a major social and economic crisis will result within Greek society, with the Greek government unable to pay the wages of public sector workers and so on. The Greek banks would face a second crisis as their Greek government debt is defaulted upon and would be in need of recapitalisation. A major social explosion with potentially revolutionary consequences would also be likely. Greece could be left with no better alternative than to break from the euro, redevelop its own currency, which it would then be able to print to pay wages and so on as well as creating a devaluation that the Greek establishment would hope to increase its exports with.

The other possibility, which is less likely in my opinion, is that the voices within Germany and other stronger European economies calling for them to break with the euro become more dominant and the Eurozone is broken up by the stronger economies. Either way, it seems likely that we are facing the end of the euro as we know it. The details of how that may happen are complicated by the fact that there is no legal way to leave the euro or expel a country from the euro. However, that won’t stand in the way of the logic of events. The results of that development could be dramatic – potentially threatening the character of the EU as a common market, as well as providing a further impetus for the development of major social movements within Europe.

Paul Murphy is the Socialist Party and United Left Alliance MEP for Dublin. 

Image top: Lars Tinner.