Gwynne Dyer: Could Greece's default lead to the collapse of the euro?

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      Last year, Germany’s chancellor, Angela Merkel, warned: “Nobody should believe that another half-century of peace in Europe is a given. If the euro collapses, Europe collapses. That can’t happen.” But there is now a risk that the euro, the 10-year-old common European currency, might indeed collapse. The trigger could turn out to be last weekend’s election in Greece.

      New Democracy and PASOK, the centre-right and centre-left parties that have alternated in power since democracy returned to Greece in 1974, were abandoned by voters in revolt against the savage austerity measures that those parties had accepted in order to keep the country in the euro. The beneficiaries were radical parties of the extreme right and left.

      Most shocking was the rise of the neo-fascist Golden Dawn party. Its shaven-headed street fighters give the Nazi salute and systematically attack immigrants on the streets—and it got seven percent of the vote. Golden Dawn, together with two other ultra-nationalist parties that are equally hostile to immigrants, the euro, and indeed the European Union itself, got the votes of one Greek in five.

      Even more Greeks backed the hard-left parties which also reject the deal with the EU and the International Monetary Fund that gave Athens enough money (174 billion euros—$225 billion) to go on paying its immense debts. The price was brutal cuts in domestic spending in Greece, and the voters revolted against it.

      Greek incomes have fallen sharply, and one-quarter of the workforce is unemployed. It’s not a recession in Greece, it’s a full-blown depression, and Greek voters don’t want to hear about how massive foreign borrowing and corruption at home got them into this mess. They just want it to stop.

      The main target for their ire is the deal that forced this austerity on Greece, and the chief victims have been the two traditionally dominant centrist parties that signed it. Between them, three years ago, they got almost 80 percent of the vote. This time they got just over 30 percent. The missing 50 percent mostly went to parties of the extreme right or radical left that reject the deal.

      Those parties are too far apart on other issues to form a government in Athens with majority support in parliament, so there will probably be another election in June. If no coalition that will abide by the deal comes out of that election, then the EU will halt its financial aid to Greece—and when the next big payment on the country’s debt comes due at the end of June, Greece will default.

      This raises two questions. What will happen to Greece if it defaults on its debts and crashes out of the euro? More importantly, what will then happen to the common currency, and to the European Union itself?

      Countries that default on their debts have a very hard time. When Argentina defaulted in 2001, there was a 60-percent fall in domestic consumption. Bank accounts were frozen, supermarkets emptied, and imported goods disappeared from the market. Inflation soared, jobs disappeared, and by 2003 more than half the population was living below the poverty line.

      On the other hand, Greece is experiencing a good deal of this misery already. Unemployment is as bad as Argentina’s was at its worst. But in a few years, freed from its burden of insupportable debt, Argentina’s economy took off. Foreign banks started lending to it again, and for nine years now its GDP has grown at around eight percent a year.

      Many Greek voters think they can renegotiate the deal with the EU and stay in the euro. That is almost certainly untrue. But in the end, default may turn out to be better for them than staying in the euro and suffering endless austerity while trying to pay off an impossible load of debt.

      The bigger question is, what happens to the euro if Greece leaves? The common currency was conceived as a vehicle for achieving the “ever closer union” that most EU politicians used to orate about, but that was putting the cart before the horse. Without a single authority that can enforce the necessary fiscal and budgetary disciplines, such a currency is bound to fail.

      On May 7, Jacques Attali, a former adviser to the late French president François Mitterrand, said that the euro will not last five more years “unless there is a single European state”. He’s probably right, but there is obviously not going to be a single European state in five years’ time.

      Therefore, by Attali’s own logic, the euro as we know it is doomed. But Angela Merkel is probably wrong: that is unlikely to spell the end of the European Union itself. The EU survived perfectly well for 40 years without a single currency.

      The Greeks will probably be using new drachmas before long. The Spanish may also be back to pesetas and the Italians to lire before we are much older. Perhaps the euro will survive as the common currency of the rich and efficient economies of northern Europe, and perhaps not. But the demise of the euro would not mean the end of the EU or of peace in Europe.



      Gentleman Jack

      May 9, 2012 at 1:35pm

      Unless a country has severe internal economy problems (real economy: infrastructure, men, resources, not fake accounting-book economy) default is always better than allowing the lifeblood of the nation to be sapped by proponents of debt-slavery.

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      Arthur Vandelay

      May 9, 2012 at 2:11pm

      People should man up to their debts and commitments. To do otherwise is a sign of weak character whom others will no longer take seriously or treat with respect above that of an unfortunate.

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      May 9, 2012 at 3:19pm

      @Arthur: Greece, however, is not a person.

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      Gentleman Jack

      May 9, 2012 at 3:53pm


      To the debt slavery crowd, all that means is that there is the necessity of finding human resources to act as surety for the debts of the artificial persons like Greece.

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      May 9, 2012 at 7:56pm

      I have a hard time imagining why any severely debt-ridden country would choose to do anything OTHER THAN default. I can think of several examples of countries that did just-fine-thank-you-very-much within a fraction of a generation of defaulting, but no examples of countries that went down the toilet for defaulting.

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      May 9, 2012 at 8:59pm

      For once I agree with Gentleman Jack.


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      May 10, 2012 at 5:35am

      Much of the 'debt' is for the weapons of Nato.

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      May 10, 2012 at 7:03am

      In Voltaire's Bastards, John Ralston Saul asked what's so bad about countries defaulting on loans? Renaissance kings and princes did it all the time, and the sky did not fall. In a few years the country found some other sap to loan them money.

      The problem, according to Saul, is that in medieval and renaissance times, money lenders were seen as necessary evils, little better than scum of the earth and certainly not deserving of respect; while in our modern time we consider them pillars of society and primary supports of our economy and accord them vast amounts of respect.

      Perhaps a middle-of-the-road attitude toward money lenders would be more beneficial to society as a whole.

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      Stephen Pacarynuk

      May 10, 2012 at 7:35am

      The debt in Greece is the same sort of debt that struck the US. People without the proper means to repay were loaned money because lenders sought to make a profit. In the US it was the Asset-based securities that provided the whee factor to lenders, In Greece it was the Euro. The solution in both cases is the same. Walk away from the hole and stop using the shovel. The difference between the two lies in who makes the decision - in the US it was families and in Greece its a government...

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      Douglas Bjorkman

      May 10, 2012 at 3:53pm

      Whle German led austarity is not the answer Greece does need to recognize that at least some of it's government largess hs to be reduced. Retirement ages and benefits need to be increased and reduced respectively. Admittedly this cannot be done suddenly without excess dislocation and betrayal of those who have ordered thier affairs of the basis of the goveernments promises. But being a waitperson is not such a high stress job that it deserves early retirement. Nor does it make sense to pay railway employees so well that it would be cheaper for the government to send National Railway passengers by taxi.

      Gradually things will have to change. But the problems can't be solved overnight without distroying the economy. Without at least some change ther won't be any willing lenders after a default.

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