It’s probably the first time that events in Spain have decided the outcome of a Greek election. Last weekend, the European Union agreed to loan Spain’s nearly insolvent banks 100 billion euros on relatively easy terms. Syriza, the hard-left protest party that came from nowhere to dominate last month’s election in Greece, will therefore almost certainly emerge from next Sunday’s rerun of that election as the biggest party in parliament.
The party that wins the largest number of votes in a Greek election gets an extra 50 seats, so Syriza will probably lead the next Greek government. It would then demand a renegotiation of the EU’s much harsher terms for bailing out the Greek economy—and it might even get it.
That would prolong the agony of the euro, but it wouldn’t actually save it. The common currency is doomed, at least in its current form, precisely because countries like Greece and Spain were allowed to join the euro.
It’s not that they were more reckless and improvident than the northern European countries who were really guaranteeing the common currency’s value (though the Greeks certainly were). What dooms the euro is the fact that the southern European economies are far less efficient.
The fundamental mistake was made in 1999, when the political attraction of a common European currency triumphed over the economic rationality that said countries with radically different economies should not be trapped in a single currency. The current financial crisis, which threatens to destroy Europe’s prosperity and even its unity, is an inevitable consequence of that original error.
The economic logic argues that less productive economies should have their own currencies, which they can devalue from time to time in order to stay competitive. But the political imperative of European unity is still seen as linked to the euro (though it doesn’t have to be). Endless dithering over bail-outs is the result.
What happened to Spain illustrates the problem. Spanish governments were responsible in their euro borrowing: they never ran a deficit of over three percent before the world financial crisis hit in 2008. The euro did, however, let Spanish consumers and companies borrow money at a very low rate of interest, since everybody assumed that the powerhouse economies of northern Europe were the ultimate guarantors of euro debt.
The result was one of history’s biggest housing bubbles, a mountain of corporate debt as Spanish companies went in for headlong expansion—and huge exposure to bad risks by the Spanish banks that lent the money.
In 2008, the inflated property values crashed and the foolish investments came home to roost. The Spanish government’s borrowing ballooned as it poured money into saving the banks—and when it could not raise any more funds either, the European Union stepped in last week with 100 billion euros to stave off a default.
Well, it had to. A Spanish default would bring the whole rickety structure crashing down, and nobody has yet figured out how to dismantle the euro without a huge amount of collateral damage. The EU is merely doing crisis management and has no strategy for fixing the euro (other than a unified European state, which is not going to happen). But what interests the Greeks is the terms of the EU loan to Spain.
It was made directly to the troubled Spanish banks, with no obligation for the Spanish government to raise taxes or cut spending further. That is exactly the deal that Alexis Tsipras, the charismatic leader of the Syriza party, says he can get for Greece, and in this last week before the Greek election he will use the evidence from Spain to good effect. He will, of course, make no mention of the fact that Spain’s crisis and Greece’s are very different.
From the day the euro was launched in 2002, Greek governments borrowed like there was no tomorrow, and lied to the EU both about the scale of the country’s indebtedness and the purposes of the loans. (Much of the money went into the pockets of their own cronies and supporters.) The entire country was living far beyond its means, which is why the decline in Greek living standards since the crisis struck has been so steep.
Greek voters don’t want to hear about that. They just want the pain to stop, and many of them believe Tsipras’s promise that a new government led by the Syriza party can renegotiate the terms of the bail-out so it hurts less.
He may be right, at least in the short run. Even if there were some super-secret team of financial experts in Frankfurt working out how to wind the euro up without too much damage to the German economy, they would need to time their move very carefully. They would not want a Greek default to cause the euro to unravel prematurely, and a flat “no” to Tsipras could bring that on very fast.
In fact, there almost certainly is no such team. There is no “Plan B”, and all the EU authorities are doing is endless, day-to-day crisis management. One day it will fail, but they’re not ready to admit that yet. So the Greeks may actually win some short-term relief by giving Syriza a mandate.