It happens like this: The election result in Greece means pro-austerity parties lack the parliamentary support and the moral authority to govern. Demands from Athens for the tough bailout conditions to be softened are turned down flat by the IMF, the European Central Bank and the European Commission.
Political impasse in Greece leads to a second general election being called for next month. German Chancellor Angela Merkel makes it clear the next tranche of cash to keep Greek banks and the Greek state solvent will not be given unless the plan is adhered to in full. The strains on the single currency become intolerable — Greece leaves the euro and defaults, starting the process by which monetary union unravels.
In May 2010, when British Prime Minister David Cameron and British Deputy Prime Minister Nick Clegg were negotiating the terms of their coalition agreement and Greece received its first package of financial support, the idea that Europe was about to be gripped by a crisis that would put monetary union in peril was ridiculed. Today, as the euro falls on foreign exchanges, the Greek stock market plunges and investors pile into the safe haven of German bonds, it no longer seems quite so far-fetched.
The jittery mood in the markets reflects the fear that the turmoil of the past five years — the sub-prime crisis, the near-death experience of the banks, the deepest slump since the Great Depression, the sovereign debt crisis — is about to reach a climax over the coming months, with a battle for the euro’s very survival.
For two years, Europe has been force-fed a diet of unrelenting austerity. The crisis began in the private sector — in over-leveraged banks and wild financial speculation — but such was its impact on consumer spending, investment and trade that governments have seen their public finances dive deep into the red. Spending cuts have been imposed, pensions have been made less generous and taxes have gone up.
The policy has been an economic disaster. Growth has collapsed, unemployment has soared and — unsurprisingly — budget deficits have been much bigger than forecast.
Election results from France and Greece show that it has also been a political disaster — voters have decisively rejected euro-sadism and made it clear they want their politicians to chart a different course. Democracy has trumped austerity.
In the fantasy world of policymakers in Brussels, the eurozone would fast-track to full fiscal union, but there is no realistic chance of this happening any time soon. Nor does there seem much prospect of ameliorating austerity, with a growth strategy that would give the more vulnerable countries a fighting chance of meeting the currently unrealistic deficit reduction targets.
French president-elect Francois Hollande may be talking about “a new start,” but his slogan finds no real echo in Berlin, where the German government is insisting that last weekend’s elections change nothing of substance. To be sure, Merkel has emphasized the need for growth in her message of congratulation to the new French president, but while the rhetoric may change, the German policy stance promises to be unflinching.
Greece, according to Merkel, must grind its way through its structural adjustment program and France must adhere to the fiscal compact thrashed out late last year — there will be no eurobonds to transfer resources from rich to poor parts of the eurozone and no extension of the European Central Bank’s remit so that it can emulate the quantitative easing programs of the US Federal Reserve and the Bank of England.