Vicky Pryce, author of Greekonomics: The Euro Crisis and why Politicians Don't Get It, on why a lack of decision on the Eurozone crisis puts us all in danger
I hope it is just the constant miserable rain that has influenced my mood but I can’t help feeling increasingly despondent about the state of political indecision that seems to be apparent in Europe when there is so much at stake. If the current banking crisis is not resolved quickly enough there is every likelihood that the world economy will see a drop in activity and rise in unemployment of the sort we saw after the collapse of Lehman Brothers. Spain’s problems at present are obvious for all to see – a severely undercapitalized banking system with a government needing to urgently stave off a major crisis of confidence , without throwing away its commitment to fiscal responsibility. But the country cannot access markets anymore and needs direct help. And instead of the acknowledgment that they have been good boys and girls who have tried their best but, circumstances being out of the Government’s hands, should be given some help, what we see instead is a row and a German intransigence that sets that country quite apart from most of the rest.
So let’s look at the events of the last few days to get confirmation of this. An emergency G7 finance ministers meeting on Tuesday left the markets guessing, although the fact that the meeting at least took place allowed a glimmer of hope that we may be moving towards some sort of solution. But, crucially, there was no announcement afterwards of what was discussed, and apparently Greece was not mentioned. Is that possible? And did it make sense to have such a session and not say much afterwards, and leave the markets fumbling around in the dark? Yes it was just a teleconference, but it was advertised in advance and had generated a lot of excited anticipation and, therefore, one would have expected that there would be something more positive to say about the banking crisis and, in particular, Spain. But no, so it leaves them still embroiled in arguments, with the Germans in particular, about the way in which its banks can be recapitalized. It is a sign of the schizophrenia so much in evidence in the eurozone. On the one hand there seems to be discussions about achieving a sort of banking union that would require a central supervising authority, and also a eurozone wide deposit insurance scheme. This would reassure investors and depositors and would prevent a bank run in the future, although it would mean a considerable loss in sovereignty for the individual countries involved. It is sold in the papers as a German idea, as it would also imply a much more centralized control of a country’s fiscal stance. And yet, at the same time, it appears that Germany is refusing to let Spain have direct access to the European Financial Stability Facility and the forthcoming European Stability Mechanism to recapitalize its banks, which are in urgent need of capital injection (anywhere from 40 billion to 100 billion Euros). So we are at an impasse and one wonders, really, how it is possible that the new eurozone infrastructure, which has created a firewall to stave off crises, is meant to operate when the very countries that agreed to set it all up are disagreeing about how it can be used.
Meanwhile, growth prospects are declining across Europe and nowhere faster than in Greece. The ability to avoid bank runs seems to be reducing by the minute. Retail sales in Greece are dropping like a stone, and the Greek markets have also been spooked by the statement by Standard & Poor, the credit rating agency, that there was a one in three chance of Greece leaving the eurozone. The Greek elections of June 17 are obviously crucial, and they are then followed by a G20 summit in Mexico, and by the European leaders summit at the end of June. Plans are being drawn up, we are told, to bring a solution to the crisis. But recent events are beginning to make me think that we may well be moving into ever more dangerous territory, where Greece is just a pawn that may be increasingly seen as easily expendable, in order to teach others a ‘German’ lesson on how not to behave in relation to fiscal austerity.
But we are talking about people, and not about a non-functioning and misbehaving car whose upkeep and servicing you have tended to ignore until it becomes really difficult to navigate and control, and which you then feel justified to discard, or consign to the scrap heap. We are talking about a whole nation, which is suffering its fifth year of absolute decline in living standards and where its democratic protest vote in the inconclusive May 6 general elections is ridiculed and mocked by its eurozone partners and beyond. But would it all stop with Greece being ejected? I suspect not, and the events surrounding the Spanish spat at present suggest that solidarity has disappeared and that even if the ‘project’ survives, the trust in each other will not.
Vicky Pryce is a Greek born economist and former Joint Head of the UK Government Economic Service.