EUROSCOPE. The billion dollar question

It was just under three years ago, in late July 2012, that European Central Bank President Mario Draghi, in a conference in London, pledged to do whatever it took to “preserve the euro”. Those comments and his assurance that the euro was “irreversible” have since been seen as the defining moments of European economic history, and have been, to a large extent, responsible for the return of confidence to many of Europe’s peripheral regions (Italy, Spain and even Greece up until January’s parliamentary elections).

But that pledge is now facing its greatest ever test, following last weekend’s victory of the “OXI” camp in the Greek referendum, which made clear that the country stood with the governing Syriza party in opposing the reform package proposed by the EU in return for aid extention.

While daily developments make the eventual outcome hard to predict (the departure of finance minister Yanis Varoufakis, though seen as an olive branch to other Euro Zone members, is unlikely to tip the scales, with his replacement, Oxford-educated Euclid Tsakoalotos of the same political suasion), the chances of a Greek exit have never seemed as high. “A Grexit is our base case,” says Holger Schmieding of Berenberg bank.

Many don’t expect an immediate exit — from the rest of Europe’s perspective, the politics of simply ending negotiations would be problematic, placing responsibility firmly on their shoulders, in the eyes of the rest of the world at least.

French President François Hollande is certainly positioning himself as Greece’s last bastion of hope, in contrast to the intransigent image built up around Germany.

However, it would be overly optimistic to expect much concrete change in what the rest of the Euro Zone has to offer: the hands of many European nations are tied by their own democratic mandates. Germany, for one, would have to return to the Bundestag to get approval even to begin changing the terms of the bailout in any major way.

A deal is possible but would likely be just as tough as the previous one in terms of reforms demanded of Greece, with any compromise likely made up of greater future debt relief.

Arguments that the process has undermined democratic values are perhaps unfair given that the opinions of other European nations being called upon to support Greece have to be taken into account.

It’s easy to return to the argument that Greece should never have been allowed in the first place (much has been written on the way in which rules on budget deficit to GDP percentages were circumvented when it joined the Euro Zone in 2001), but that’s pretty much pointless.

Greece and Europe have both moved on and its hard to tell whether Greece would have been a more prosperous nation without the strictures — a single currency and interest rates.

Certainly when it emerged from the dictatorship of the early 1970s, joining the European project became an integral part of its story and growth as a democratic nation.

In the short term, whichever way the situation works out, things will be painful — with banks set to run out of cash imminently and images of despairing Greek citizens withdrawing paltry amounts from cash machines a grim presage of the even greater humanitarian crisis to come. A devaluated currency would place huge burdens on an already stretched population.

For Europe, however, there remains a certain sense of calmness, and resignation amid analyst circles, about the EU’s ability to withstand contagion, even in once vulnerable “peripheral” nations such as Spain, Ireland and Portugal.

Analysts have pointed to the relatively small rise in government bond yields of those countries as proof of confidence in their resilience.

Among those expected to be worst impacted by a Grexit are Bulgaria, Romania and Serbia, in which markets Greek banks hold a sizeable share. Economic questions aside, however, there are questions over how much damage a Greek exit — and smaller Euro Zone — would inflict on the European project. Greece, bordering on the Baltic states and not far from conflicts in Syria, has an important geostrategic position for Europe.

The current situation should provide a moment of introspection for the Euro Zone, while the European project — both as the Euro Zone and the wider political project — have lived up to some of their aspirations, such as regional peace (60 or 70 years ago such a period of peace within Europe would have been unimaginable).

That said, prosperity, unity and stability that were meant to be at the heart of things have been shown to be lacking (though this should in no way hide some of its triumphs, including on a progressive climate change policy, human and labour rights).

And mistakes have been made on all sides — including the imposition of overly onerous debt repayments by Europe on Greece and other nations, and the ECB’s laggardly adoption of monetary easing.

Europe’s challenge now will be rebuilding the positive story, and the benefits of both EU and Euro Zone membership. Greece is far from its only weak point.

The anti-EU movement in Britain is gaining support ahead of a referendum that must be held by the end of 2017, with the ‘No’ camp comprising an unlikely combination of rightwing Euro sceptics and those on the left who believe the European project has become an autocratic and anti-humanitarian project that fails to protect the weakest in society.

COMMENT NOW