LONDON, UK — Conventional wisdom has begun to dismiss the fear that Greece can take down the global economy as something from the folk tale Chicken Little. Since 2010, each week has appeared to bring a new round of European summitry, another do-or-die moment for the Greek economy — and the sky hasn’t yet fallen.
Each time, the leaders of the euro zone — whose countries gave up their national currencies in favor of the euro — have managed to do just enough to stave off disaster.
Acting with the International Monetary Fund (IMF) and European Central Bank (ECB), they have bailed out Greece, Ireland and Portugal and set in place mechanisms to do the same for Spain in exchange for severe cuts to government spending and deep reforms to their pension systems, job markets and social safety nets.
The streets of economically distressed southern European countries have filled with demonstrators and tear gas. Newspapers have printed angry words about Germany, the economic powerhouse that largely shapes the terms of the bailouts. Such outbreaks of protest occurred last week in Spain, Portugal, Italy, France and Greece: places where the combination of spiraling national debt and the loss of competitiveness have caused the greatest damage.
So should it be any different on Tuesday, when euro zone finance ministers meet in Brussels to decide whether to release the next tranche of bailout money to Greece?
Perhaps. Because this time, it’s not just the German-led haves and southern tier have-nots that are fighting over the damage austerity has done to economic growth and people’s lives.
Serious splits have emerged among the rescue party, too, as the IMF has lost patience with Germany’s insistence that countries already in or near economic depression should continue to cut spending rather than grow their way out of debt.
Economists Dawn Holland and Jonathan Portes backed the IMF's view in a new report from the London-based National Institute of Economic and Social Research. “Not only would growth have been higher if such policies had not been pursued, but debt-to-GDP ratios would have been lower,” they wrote. “It is ironic that, given that the EU was set up in part to avoid coordination failures in economic policy, it should deliver the exact opposite.”
Since the onset of the crisis in late 2009, Germany and other euro zone countries in northern Europe that are less burdened by debt have been unwilling to allow growth-oriented policy from being implemented. They have preferred radical austerity to anything that would look like it would ask their taxpayers to bail out what German papers regularly refer to as “Club Med economies.”
But a good portion of the more than $1 trillion in bailout insurance that has been created since the crisis began comes from the IMF, and some of its leading members — including the United States, Britain, China and others — appear to have had enough of Berlin’s brinksmanship.
Tuesday’s meeting is supposed to focus on Greece and ways to implement the previously agreed goal of reducing Greek sovereign debt to 120 percent of GDP by 2020. That’s still high, although lower than the current nosebleed level of 188 percent.
With austerity plunging Greece into depression, its political system in tatters, unemployment conservatively estimated at 24.4 percent and the country unable to devalue its currency to improve exports, Germany and its allies now want to give the government another two years to reach that target by extending it to 2022.
On Sunday, IMF’s managing director Christine Lagarde indicated she’s had enough of kicking the can down the road. Making it clear she believes richer euro zone nations should write off some of Greece’s debts, she said she’ll push for a more sustainable deal “rooted in reality and not in wishful thinking.”
Could the moment be approaching that finally ends Greek membership in the euro zone? A former French finance minister and Goldman Sachs executive, Lagarde could precipitate just that if a standoff leaves Greece unable to meet its obligations. At stake is a $35 billion transfer from the ECB — agreed to in a previous bailout but contingent on Greece meeting its debt targets.
Whether or not the euro zone fudges its latest crisis, the situation clearly cannot go on forever. Even those siding with Germany are hard pressed to map out a scenario whereby Greece can detach itself from ECB life support in the foreseeable future.
ECB policy board member Joerg Asmussen, a German economist, told German television this weekend that Tuesday’s summit could patch up Greece for the next two years at best.
“You have to be honest and say we do not really expect the country to have access to markets in 2015 and 2016,” he said. “That means a follow-up program would be necessary.”
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Will Spain, Italy or France — which the Economist magazine dubbed “The time bomb at the heart of Europe” on its cover this week — last that long? No one knows, but markets are increasingly uneasy.
“A further shock could well see other governments — including the Spanish and Italian governments — no longer being able to rely upon the private markets to refinance maturing debt,” warned Alastair Wilson, chief European credit officer of Moody’s Investor Service on Friday.
And as even Germany’s economists know, if Spain goes and Italy wobbles, the euro zone will be kaput.