Future historians are unlikely to look with favour on the way that the eurozone crisis has been handled by the region’s leaders. Whether or not Greece now leaves the single currency, hindsight will surely record that from an objective perspective there was a better way to have dealt with the crisis. If the Greeks do depart, which has seemed the most likely course for at least six months, the bill for not confronting and securing that outcome much earlier will be very high.
Even if the Greeks vote to stay in, the steps that will be necessary to enable Greece and the other peripheral countries to stay in the eurozone – which must eventually include fiscal union, greater powers for the European Central Bank and eurozone bonds – are patently also ones that could have been put in place earlier. (It is worth repeating that while that solution would enable the euro to survive, it will do nothing to resolve the underlying structural problem of competitiveness within the weaker countries that the current crisis has so brutally exposed).
It is of course easy to explain why the crisis has evolved in the way that it has. The policy of creeping integration that was adopted by the euro’s creators was deliberately chosen to bypass the inconvenient fact that the creation of a single currency lacked democratic legitimacy. It is doubtful whether it has ever carried majority popular support across the continent as a whole.
This was a project that has been driven through by an elite that thought, for better or worse, that it was acting in the best interests of the region’s citizens and had the power, if not the legitimacy, to bring that to pass. Such high-minded determination was a strength in one way – it kept the momentum of the project going during the early years – but has since become a fatal weakness as the economic climate has changed. In their determination not to confront reality, Europe’s political leaders have repeatedly failed to confront the issues that matter in a timely or decisive fashion, with ever more severe consequences.
It is now two years since the onset of the Greek debt crisis and watching it unfold since then has been, as has been widely noted, like watching a slow motion train wreck. There are, one German banker reminded me the other day, 15 cities in China that each have a larger GDP than Greece. Yet somehow this tiny country’s debt problems have escalated to a point where it threatens the entire single currency project. Worse still, by elevating the future of the eurozone into a permanent soap opera that has produced crisis headlines for months, Europe’s leaders have done everything they can to talk the region into a recession.
A crisis that required a clear and determined response has instead produced mainly indecision and ineffective wrangling. Germany continues to call the shots, with its insistence that no further steps towards integration and the measures that could halt the crisis are taken until or unless all member countries can demonstrate their willingness and ability to meet the rules of membership.
The logic is incontrovertible, and indeed necessary if the eurozone is to have a long-term future.
But the logic would have been so much better deployed before Greece, Portugal and other new members of the eurozone were first admitted, rather than now, when the collateral damage from that stance, for those countries in particular, has become so great. The most likely outcome remains that the Germans will eventually agree to eurozone bonds and greater ECB powers, but not before the Greeks and possibly one or two others are forced out of the single currency.
That may be the least worst outcome from here, if it can be delivered without a systemic crisis, which is possible but not certain. But how much better it would have been if we had not started from here. The financial markets, in retrospect, are not immune from blame. The convergence of sovereign debt yields in the first few years of the century looks now to be an act of sheer stupidity, for which the most charitable explanation is that bond investors simply assumed there was a de facto region-wide guarantee of all eurozone member debts.
If so, they have had a rude awakening. Not for the first time, many investors have been guilty of a failure to read the small print on the prospectus, where the absence of guarantees was abundantly clear to those who cared to look. The Greek debt write-off, when it is finally complete, will surely go down as one of the worst defaults in market history – and one of the worst handled from start to finish.