Wednesday, 9 May 2012

Eurozone Crisis: Latest Episode

Surely it is now a matter of time before Greece exits the Eurozone. Only the deluded (and Angela Merkel) still believe that Greece will abide by the Draconian austerity measures imposed on that country.

The Greek voters have severely punished the pro-austerity main-stream parties on both sides of the centre. The vote share of the two parties New Democracy (right-of-the-centre) and Pasok (left of the centre) collapsed. Pasok, which, in the 2009 elections had garnered 44% of the votes, saw its vote-share tumble down to just over 13%.

The country has seen the sudden rise of the ultra-left Syriza party, with its young leader (described as charismatic in some newspapers) Alexis Tsipras, now being asked by the Greek President to see whether he can cobble up a coalition.

Tsipras says he wants to stay in the Euro but rejects the austerity measures. He wants to renegotiate the terms with Germany. It is a bit like a hedgehog wanting to negotiate the right of way on a country road with a steam-roller.

In any case Tsipras simply does not have the requisite numbers. Pasok leader, Evangelos Venizelos, is refusing to renege on his party’s pledge to implement the terms of Greece’s aid package. So he is not going to join hands with Tsipras, who is against austerity measures. At the other end are the Communists, who have rejected Tsipras because they want out of Euro.

There will probably be another election in a few months, and the pro-Euro parties may feel that they have another chance to curry favour with the voters. The chances of Ed Miliband discovering charisma are higher than that happening.

There are really only two options left for Greece. Either it negotiates an orderly exit from the Euro or it is kicked out. The former would be the preferable. Berlin will accept that the Greece politics has become so fragmented (or polarised or whatever term that is acceptable) that the politicians will find it impossible to get the Greek public round to the idea that it is in their interest to stay in the Euro, which means that austerity measures—which have hit the poor and the public sector work force the hardest—are inevitable. There is always a teeny-weeny chance that the military will step in, in which case we shall have the pleasure of witnessing the first military dictatorship in the Eurozone. And Greece won’t be the only one to leave Euro. Other peripheral countries such as Ireland, Portugal  might leave Euro too. Perhaps Germany and its allies such as Netherland can form a group and have its own currency, and the rest of them (Spain, Italy included) can continue with a devalued euro.

The other scenario is of course that one inconclusive election will be followed by another one and essentially there will be anarchy. The reforms demanded by Berlin (and Brussels) will not be met, and with no Eurozone aid there will be no money left to honour contracts and pay public sector workers. Greece will be where Argentina was a few decades ago and Iceland a few years ago. There will be no money left to pay the creditors and the country will be declared bankrupt.

The headache for Brussels and Berlin is that Greece going bankrupt will have a direct knock-on effect on other Eurozone countries such as Ireland, Spain, Italy, and Bulgaria. Investors may start pulling their funds out from these countries which would leave Berlin and Brussels with a bill that would be larger than if whole of Greece were to subsist entirely on the Eurozone largesse.

The Spanish economy, the fourth largest in the Eurozone, is just a few notches above the junk status. The economy is in recession for the second year running and unemployment has risen to 25%. The government borrowing has jumped to 6%, and, if Spain, whose economy is seven times the size of Ireland, needs a bailout it will cost the Eurozone hundreds of billions of pounds. Spain’s property market has collapsed and Bankia, its fourth biggest bank, created by amalgamation of seven struggling banks, is more exposed to property than a P-listed British diva to the Caribbean sun. Spain’s conservative government (elected in 2010) announced that public sector money won’t be used to prop up struggling banks. (Sounds familiar? I will bet my ex-girl friend’s life that tax-payers’ money will be used as a ‘last resort’.)

Portugal, which has negotiated (so far) a 78 billion euro bailout deal, is scrapping 4 of its 14 yearly public holidays. The wages of public sector workers have been cut and taxes have been raised. It’s like arranging the deck-chairs as the Titanic sank.

The newly elected Socialist French President, Francois Hollande, is making noises about focusing on growth. However, his idea of growth is probably different from the idea of growth of others in the Eurozone. Hollande would not be in a hurry to reign in the role of the state, and would go on about loser (and easier) fiscal and monetary policies. Also I don’t think Germany is fully convinced about it. Germany may pay lip service to growth, but what it is pushing for is austerity measures, although that is not working either (as events in Greece and Spain demonstrate). When troubled countries are forced to trim their spending very fast (and simultaneously raise taxes, which is what is happening in Britain, too), it actually makes it much more difficult for these countries to reduce the debt as percentage of the GDP—because the GDP itself is shrinking. As a Euro-sceptic friend of mine (he hates the Germans) never tires of reminding me, euro is beneficial only to Germany and to no other country. They tried to take over Europe twice in the last century, but were unsuccessful. It might be third time lucky for them. (It never ceases to amaze me how these fanatics manage to turn any debate to the subject of their pet-hate.) This friend is also predicting that the USA is headed for a fall and is advising anyone who is willing to give him an ear (mercifully not many) that they should buy Swiss franks and yuans, the Chinese currency (an advice he is regrettably unable to follow himself, as he last worked in 2002). He told me in a conspiratorial tone that Russia, India and Brazil are already settling deals in yuans, as they know that the dollar is going to lose its status as the world's reserve currency.

The BBC economics editor, with her defiantly optimistic view, wrote that these developments need not spell the end of Eurozone, but uncertain times are ahead. (I have been saying this since 2008). What seems to be happening is that the crisis is moving up the food chain. Spain is next; and after that Italy.

I think the next book I will read is As I Lay Dying. It is chosen by the bookgroup which has extended a cordial invitation to me to join. More about it some other time.