The chances of things getting worse are high. Societal strains and rampant corruption do not in themselves cause economic weakness – just look at China and India – but they don’t help. Alas for Greece, even if both problems were to disappear tomorrow there is little reason to believe its economic rot would stop.
Greece exports so little that it is the most closed economy of any among the 27 countries that form the EU. A small economy of just over 10 million people can never get rich without exporting.
No economy can get rich without innovating. About the best indicator of a country’s capacity to innovate is the amount spent on research and development. In Greece, businesses and the state spend 0.5 per cent of GDP on research annually, less than one-third of the EU average. Of the 15 long-standing members of the EU, it has consistently had the lowest research spend.
There is very little reason to be optimistic about Greece. Its economy, politics and society don’t work. This is not only very bad for Greeks, it is also bad for the people of the 16 other countries in the euro zone. If it implodes, it may well bring the single currency down with it.
Meanwhile, John McHale at the Irish Economy blog points to Wolfgang Münchau in the FT on “Why debt rescues will boost the scenario of a closer union”. As Wolfgang Münchau admits
Future perceptions are hard to predict, which is why my path to fiscal union is not a forecast but merely a scenario. And it is clearly an accident-prone process. But with each rollover, you will have to be progressively bold to vote no. This is why I believe that a debt rollover favours a political union in the long run.
What should happen now is very hard to say. If the ECB capitulates the politicians in France and Germany will save face. They will be able to claim it was all the ECB’s fault and it should never have lent the money, but what choice is there but to bail out the bank?
This is a definite possibility and would be the way to go if the objective was to bring about a once-off subsidy from the rich states to the poor ones.
The alternative is to put some sort of structure in place to take the debt off the ECB balance sheet before writing it down. It could take many forms, but some sort of common European treasury or bond-issuing body seems the most sensible.
However, whatever shape it took it would represent a lurch towards fiscal and political union that many in Europe might not favour. But, the history of European integration has been one of crisis followed by further progress and, from the outset of the current crisis, many have predicted it would lead to further integration. Looking at the predicament the ECB has now found itself in, it would appear that we are much further down the road than we realise.
The muddle-through approach to the eurozone crisis has failed to resolve the fundamental problems of economic and competitiveness divergence within the union. If this continues the euro will move towards disorderly debt workouts, and eventually a break-up of the monetary union itself, as some of the weaker members crash out.
As Kevin O’Rourke says in his post
In truth, I don’t think anyone really knows what is going to happen to the eurozone, and Wolfgang is admirably frank about the fact that he is just describing one possible scenario. But an increasing number of people are now arguing that eurozone politicians aren’t going to be able to fudge the unfudgeable forever.
The euro is dying a slow death. Political leaders are unlikely to take the steps necessary to address the underlying factors creating the current euro crisis, and the eurozone will eventually break up as a result.
To highlight the severity of the euro crisis, one only needs to glance at credit default swap (CDS) spreads for the peripheral euro area countries. CDS is a form of insurance against default or restructuring. The higher the CDS spread, the more likely investors think a sovereign default is.
In the first week of June, five-year CDS spreads for Greece were a whopping 1495 basis points, for Portugal 708, for Ireland 650 and for Spain 255. This compares with only around 200 for Iceland, a country that underwent a private default only two and a half years ago.
The euro crisis is just as much underpinned by politics as it is by unbalanced economies, rigid labour and product markets, burst property bubbles and unsustainable public and private debt levels. This has been particularly evident in recent weeks, as a cacophony of voices has emerged at the EU level on how to handle Greece.
Ultimately, it is politics, more than unsustainable debt, that will threaten the very existence of the euro.
With persistent imbalances within the euro area and the inevitable restructuring of Greek, Irish and Portuguese debt, there are two possible endgames for the euro crisis: fiscal union or eurozone breakup.
Read the whole thing.