The crisis of the euro zone has finally hit the potholed road of real politics, with the Greeks now openly questioning whether their commitment to Europe and its single currency still matters more to them than control over their own future and economic well-being.
During the two-year financial crisis, the wealthier countries of northern Europe, led by Germany, have insisted that their heavily indebted brethren in the south radically cut spending in return for emergency loans. They have stuck to that prescription even though austerity has undermined growth and increased unemployment in Greece, Spain, Portugal and now Italy, betting that people in those countries will swallow the harsh medicine because their only alternative is to default and possibly leave the euro zone altogether.
The turmoil in the government of Prime Minister George A Papandreou means that Greece is about to call that bet. Many Greek politicians appear to be calculating, at this late stage, that they have more to lose by sticking to Germany’s terms than by risking a messy default, and even going it alone with their old currency, the drachma, outside the euro zone.
Austerity, in other words, is facing its first really big political test.
“This is clearly the return of politics,” said Jean Pisani-Ferry, director of Bruegel, an economic research institution in Brussels. “The management of all this by the Europeans has been fairly technocratic. But now we see the gamble of a politician, which creates uncertainty again, but in a different form. But it was bound to come at some point.”
Papandreou’s decision to press for a popular referendum on the bailout was the inevitable result of Greece’s loss of sovereignty to Brussels and the International Monetary Fund, said Jean-Paul Fitoussi, professor of economics at the Institute of Political Studies in Paris. Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France were acting as if they were the real government of Greece, he said.
“It’s as if the Europeans — or Merkel and Sarkozy alone — believed that they were in control of the people of Greece,” Fitoussi said. “But this is a democracy. In Greece, and even in Italy, you cannot expect to rule without the support and consent of the people. And you can’t impose an austerity program for a decade on a country, and even choose for them the austerity measures that country must implement.”
As the crisis has unfolded, this tension has only increased. Complex bailout packages are hammered out by officials in secret, then are usually sent to parliamentary majorities for approval, without much recourse to the democratic voters of the 17 European Union countries that use the euro, all of which must approve each package.
As a result, the entire euro zone has found itself periodically at the mercy of seemingly minor events — the fall of the Slovak government, a court ruling in Germany, a possible referendum in Greece — that threaten to bring down the whole structure and wreak havoc in financial markets worldwide.
The combination of back-room deals and ad-hoc parliamentary approvals is necessary because the European project is essentially incomplete. The 17 countries that use the euro do not have common fiscal policies or political leadership, and have widely varying levels of development. They have a common central bank, but its mandate is far more limited than that of the United States Federal Reserve, which has intervened much more aggressively in the markets to shore up troubled American financial institutions. That has left euro zone leaders struggling to cobble together rescue packages big enough to reassure markets but small enough to pass muster with their own reluctant voters. Both voters and markets remain deeply skeptical.
For some time now, experts have been wondering at what point Europe would reach its “Lehman moment” in the crisis, that point where the problem can no longer be addressed with half measures.
If Greece, faced with a second bailout and another set of austerity demands, now says “Enough,” that point may be reached, forcing a choice between a smaller euro zone or a softer, longer-term rescue policy that emphasizes growth.
A Greek rejection of the deal could at the very least put new pressure on the European Central Bank to continue to prop up heavily indebted nations by buying their debt or even becoming a lender of last resort, like the Federal Reserve. That is a step that is anathema to Germans, who see it as violating European treaties to benefit irresponsible nations. But treaties can be changed, and Sarkozy still considers the bank to be the best answer to the problem of how to set up a firewall to protect the vulnerable while they try to fix themselves.
Merkel and Sarkozy are clearly irritated with Greece, but so far they insist that the restructuring deal agreed upon Thursday in Brussels remains, as Mr. Sarkozy said Tuesday, “the only possible path to resolve the Greek debt problem.”
But Greece’s turmoil has the makings of a turning point. Greek elections during a deep economic slump would be likely to usher in a government that would, at a minimum, to try to renegotiate the bailout deal with European and foreign lenders, a messy process that would force Germany and other European lenders to decide how strictly to stick to their austerity formula. The uncertainty would undermine confidence in other indebted countries like Italy at a time they can ill afford it.
There is also the possibility that an election or a popular referendum would pose the question more bluntly, with Greeks essentially deciding whether they want to stick with the euro or not — if they want to put sovereignty over their own affairs ahead of membership in the common currency. That could mean the fraying, or at least the shrinking, of the euro zone.
Fitoussi believes that Greeks had no choice but to ask themselves that question. “There are only two possibilities in a democracy: the government has to resign or consult the people,” he said. “Of course, I don’t know which is the worst for Europe.”