Part Two: Greek Theatre – The EU Solidarity Show Must Go On

In the second instalment about Greece and their rocky relationship with the EU, I will be taking a look at the other side of the story. Despite the hard times, Greece must remain a part of the EU. The show must go on.

As discussed in the previous article, despite Alexis Tsipras and Angela Merkel (and a lot of Europe) not seeing eye to eye, the relationship must endure. The scenario painted is effectively the middle years of a marriage: the honeymoon period is over, the parents are arguing, but they must stick together for the sake of the kids. Interestingly, if this were to be a Catholic marriage of convenience, then divorce wouldn’t be an option.

The fear of divorce should be a motivating factor in ensuring the EU actually remains a union. Syriza’s biggest request is that a significant proportion of Greek debt is written off, so the country can attempt to rebuild their economy. Although this is one way to keep Greece onside, it would trigger similar claims from other struggling nations. Moreover, when the likes of Dublin and Lisbon declared a banking crisis, they were forced to ‘fess up and accept responsibility and were then shackled to long-term repayment plans. Greece must do the same because they have borrowed heavily over the years to live beyond their means. This is the hardline stance the EU must take, as it ensures members remain committed to the Eurozone whilst giving them breathing space to repay the loans.

However, if the Troika doesn’t adhere to some of Greece’s demands, it would follow that they would simply default on their loans and waltz out of the Union. This would present a wholly undesirable proposition as a ‘Grexit’ could lead to copycat departures. To think that Greece only represents 2% of the EU’s GDP, a lot rides on their continued involvement.

If the likes of Portugal and Spain were to exit, Europe would enter an uncertain period, likely to result in a major international recession through two channels: firstly, because the international banking system is highly exposed to European bonds, a collapse of the EMU (European Monetary Union) would result in significant balance sheet losses – like the time when Liverpool broke the bank for Andy Carroll. Secondly, financial difficulties would arise through the trade channels. If the world’s largest economy (the Eurozone) was to enter a phase of recession, the effect of that would be to suppress international trade and restrict growth elsewhere. Uh oh.

For Greece, leaving the euro and reintroducing the drachma would be like choosing a Fiat over a Ferrari. The drachma would be devalued against the euro by at least 50%. Inflation would rise into double digits and interest rates would skyrocket, making loans very expensive. A Grexit would also diminish Greece’s economic and political status. Given their poor credit rating, in the event of a (likely) default, international markets won’t give Greek banks and businesses much assistance. Moreover, this could lead to a regression into a closed-economy status, where money will have to be printed to pay off internal debts – all that will lead to is inflation and a dramatic fall in living standards. Is there any incentive to leave the EU?

The root of the problem and the solution, is political. The fundamental premise of the EU was to commit to European integration. Germany, along with many of the other nations, stand to benefit from a single market – granted they pay a lot for it through financing other countries, but the EU is a formidable political force. A middle ground must be found by Tsipras and Merkel. Get her to the Greek.

 

By Kamran Khan

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s