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The Greek conundrum has exposed the governance of the Eurozone as flawed

Earlier this year former German foreign minister Joschka Fischer acknowledged the obvious writes Professor John Ryan: the austerity movement in the Eurozone is in serious trouble. Chancellor Angela Merkel and Wolfgang Schäuble, Germany’s finance minister, along with most of the German policy elite and public opinion, simply do not accept that their austerity policy is in tatters. Most EU officials and most government officials of Eurozone countries officially rejected any suggestion of a debt restructuring for Greece.

There is a need for Germany and the EU to change their tune. Otherwise, the most likely outcome of this wait-and-see strategy is chaos and possibly could lead to Greece exiting the Euro. My view has been all through the Greek crisis talks that it would be unwise of Germany to underestimate the possible or likely contagion in the financial markets that would result from a Greek exit.

From the outset the Euro was a controversial construct. It was known at its inception that the Eurozone had design flaws, including a lack of fiscal union, and no mechanisms to deal with asymmetric shocks or diverging competitiveness. A number of those concerns materialized, and investors have become increasingly sceptical about the sustainability of the Eurozone in its current form. However, political factors trumped economic concerns when the Euro was established: a united Europe, and thereby the single currency was at root a political project.

Now the project is in real trouble with out-of- touch domestic and European political elites and an establishment unable to address the concerns of public opinion.   Many people no longer trust mainstream politicians, EU technocrats and elites in general. They seem captured by vested interests and incapable of improving the life of ordinary people, let alone setting out a compelling vision of a brighter future. Politics is turning nasty, fractious and inward-looking – with unpredictable consequences. Worst of all, many people are losing faith in democracy itself. Europe’s sluggish economies are strangled by vested interests that stifle opportunity.

There is a perception that the European Union has become an instrument for creditor nations to impose their will on debtors.   Schäuble and Mario Draghi, president of the European Central Bank (ECB) have been seen as threatening and bullying Greece. On 4 February the ECB unexpectedly and suddenly cancelled acceptance of Greek bonds as collateral for liquidity funding unless Greece obeyed the Troika agreement. The ECB’s irresponsible and incompetent actions call into question their respect for the Greek government’s attempts to resolve its debt crisis in a sustainable way. The ECB may or may not have good reasons to cut off Greece – depending on your point of view – but it is clear that such a move would be political.

A central bank that is supposed to be the lender of last resort and guardian of financial stability would be taking a deliberate and calculated decision to destroy the Greek banking system. The ECB is now seen in some quarters as arrogant, unaccountable and authoritarian.   This game of chicken has driven the Eurozone into an unnecessary crisis and Greece into meltdown before serious consideration of the alternatives. The Greek government deserved the time to present its ideas for what it calls a new “contract” with its partners. Therefore the Eurozone should have negotiated in good faith.   Forcing Greece to default and exit would be damaging for Greece in the short to medium term, but it could be far more painful for Germany and some of its main Eurozone partners.

Angela Merkel finds herself in a very difficult position in Germany and, Europe. The recent QE decision by the ECB, which was opposed by a large part of the German political, policy, economics and intellectual establishment and the emergence of the left wing party Syriza in Greece, have challenged her increasingly-discredited austerity programme.  At home she is challenged by the German anti-Euro ‘Alternative for Germany’ party and by the nationalist marches against Islamification in Europe of recent months.   This narrows her room for manoeuvre on what to do about Greece and will feed her wariness about making too many concessions because the Greek dilemma might escalate into something much bigger.

Merkel has to navigate between a referendum she does not want, a majority of Germans who are willing to say goodbye to Greece including her own Finance Minister, and her own position of not wanting Greece to leave the Eurozone if at all possible.   Merkel’s leadership is being seriously questioned and tested in a way that has not happened since she was elected.   Any scenario for how to tackle the Greek debt crisis will have to be considered based on the fact that there is no chance whatsoever of Greece repaying its debts.

Only the creditor nations of Europe’s economically stronger northern region refuse to acknowledge this reality. The current set-up is completely unsustainable. There is no reason why Europe cannot recognize this and make the necessary adjustments. Otherwise, the most likely winners will be populist anti-Euro and anti-EU parties who want to put an end to the Euro construct and eventually the European Union as a whole.

Professor John Ryan is a Visiting Fellow at LSE Ideas (International Strategy and Diplomacy). He is also a Research Associate at the Von Hügel Institute of St Edmund’s College, University of Cambridge.

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