Eurozone’s Perpetual Crisis

European leaders continue to kick the can down the road on a crisis that could bring down the global economy.

The Telegraph‘s Liam Halligan explains “Why the latest eurozone bail-out is destined to fail within weeks” in rather stark terms:

Let’s be clear – if global bond markets stop lending to a number of large Western economies, we are in the realms of unpaid state wages and pensions, transport chaos and closures of schools and hospitals – sparking the prospect of serious civil unrest. Forgive my intemperate tone, but these are the dangers we face. And I’m afraid the only rational response to Thursday’s announcement is that the probability of such undesirable outcomes has just been increased.

European leaders have reached an “agreement”, we were told, with the private holders of Greek debt, who now accept a 50pc write-down on their stakes. This is predicated on an additional €120bn (£105bn) cash-injection by EU member states and the IMF. By paying bond-holders less, and making other savings, the hope is that Greece can cut its sovereign debt from 150pc of GDP to 120pc in the next few years.

This deal was presented as a “victory” by the eurocrats. After all, back in July those nasty private creditors agreed only to a 21pc “haircut” on their Greek debt. The deal is “voluntary”, though, nothing having been decided except the “50pc haircut” headline. In reality, by bargaining hard over coupons and maturities – how much the bonds will pay annually, and for how long – those who so unwisely lent money to Greece (eager to reap high yields, while always expecting a bail-out) will get a much sweeter deal. This is the discussion that will take place, behind closed doors, during the coming months. But that sweeter deal will need to be paid for with yet more sovereign borrowing, by some eurozone government or other, plus further sack-loads of taxpayers’ cash.

It is telling that Greek bond-holders themselves were on Friday reassuring their investors that the reduction in the net present value of their stakes, compared with the “21pc haircut” deal, “will not be overly onerous”. In addition, the July agreement, while also “voluntary”, included a 90pc creditors’ participation. Thursday’s variant cited no such number.

So, the centre-piece of last week’s “package” is far less decisive than meets the eye. It was, in fact, singularly indecisive. The hope that Greece will clean-up its balance sheet autonomously now relies even more on a privatization programme that is already laughably behind schedule. So the moral hazard will go on, making it tougher still for the governments of Portugal, Ireland and the other eurozone “peripheries” to sell to their electorates the virtues of fiscal responsibility.

In Friday’s Atlantic, my colleague Alexei Monsarrat and I pointed out the “Fatal Flaw in Europe’s Rescue Plan.”

Two years into this mess, the key problem remains unsolved. We have a currency union without a fiscal union.

It’s unclear whether the new governance structures the deal puts in place (i.e., a newly empowered Eurogroup) can withstand a shock to the system that any part of the plan failing would deliver, and what Europe’s next set of options will be if this unravels. It’s also another undemocratic step toward consolidation of power in Brussels, which European electorates seem to have little appetite for at the moment. In short, Europe’s leaders are delivering a Europe that its people aren’t sure they want.

Angela Merkel and Nicolas Sarkozy–and, surely, Herman Van Rompuy–can huff and puff all they want but they have little power to force Silvio Berlusconi’s hand. The government is on shaky ground politically and, frankly, haranguing from Berlin, Paris, and Brussels will likely be met with continued defiance. Earlier in the week, Berlusconi declared, “No one in the E.U. can nominate themselves commissioner and speak in the name of elected governments. No one can give lessons to E.U. partners.” That’s how it’s always been. And that’s the problem.

Halligan’s alternative vision is one many of us have been advancing for years:

What is needed, urgently, is a clean, transparent Greek default – allowing this flailing semi-developed economy to leave the eurozone, re-establish a weaker drachma and regain its self-respect. Portugal should leave too, its membership of the same currency bloc as Germany is as absurd, and self-defeating, as that of Greece. There would be further market turmoil, yes, but a few more months of volatility, leading to an ultimately more stable outcome, is surely better than the current situation where the entire world is living in fear of a massive “euroquake”.

It’s the obvious solution and best for all concerned. But there’s no political will on the part of European leaders to enact it.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College. He's a former Army officer and Desert Storm veteran. Views expressed here are his own. Follow James on Twitter @DrJJoyner.


  1. Ben Wolf says:

    Both the Eurozone leaders and ours are incapable of embracing alternatives to endless rounds of Extend and Pretend.

  2. Murray says:

    I guess that is why China has offered 100 billion euros to the fund and Russia and Brazil have indicated they would also participate (a sign that many institutions in this world are tired of the Dollar’s special stratus and welcome an alternative). The Euro trades at 1.35$-1.45$ for the last … 3 years. Not bad for a doomed currency.

    The notion that the Euro could disappear is a total fantasy promoted by Wall Street and the City who can’t get over the fact that since the collapse of the Soviet Union we live in a multi-polar world. In other words, 400 years of Anglo-Saxon absolute dominance of world finance are over, and we are going to have to deal with other ways of thinking.

    What annoys me the most about this kind of talk is that it is a fear of the future disguised as courageous “truth telling”.

  3. James Joyner says:

    @Murray: The EU has a GDP higher than the US, which is really surprising given its size. That doesn’t mean that having a currency zone without centralized control hasn’t been a disaster or that Greece, especially, shouldn’t be cut loose from it.

  4. john personna says:


    I think you’ve only shown that currency value is not a leading indicator for financial trouble.

    That 1.35$-1.45$ did not give us warning on Greece.

  5. The relative value of two currencies is far less important than the change in value over time. The Yen is worth less than two cents, but its value has increased 55% since 2007. On the other hand, the pound is worth $1.60 but is down 15% over the same time period.

    Which of the two countries do you think has been performing better relative to the US?

  6. john personna says:

    @Stormy Dragon:

    Economists disparage little people, and politicians, who confuse a currency’s “strength” with a nation’s competitiveness.

    The counter-example is handy enough. We accuse China of maintaining a low currency value, and profiting by the resulting exports.