European Stocks Are Down Slightly on Decisive Day for Greece

30 Jun 2015 | Author: | No comments yet »

Greece threatens legal action to block its exit from the euro.

ATHENS, Greece — The latest news on Greece’s financial woes on a day a big repayment to the International Monetary Fund is due and the country’s bailout program with European creditors ends (all times local): The scale of the economic pain inflicted upon Greece by years of recession and strict austerity was evident in official figures showing unemployment in the country stood at 25.6 percent in March. Greece’s seemingly impending exit from the Eurozone would have major repercussions for Europe and David Cameron’s bid to recast Britain’s membership of a reformed EU.

While the UK should take no pleasure in the tragic and unedifying spectacle playing out in Athens and Brussels, a Grexit would raise the stakes but, on balance, present an opportunity for Britain to challenge the status quo, provided the diplomacy is handled with care. The evident risk for Cameron’s renegotiation is that EU leaders’ become so preoccupied with the fallout of Greece that the “British question” slips to the bottom of the agenda. Just hours before the European part of Greece’s bailout program expires, Europe’s main banking lobby group urged the country and its creditors to make a last-ditch effort to secure a deal. But there’s an extra wrinkle to add: Along with its own self-preservation, Greece should do it for the sake of its fellow European nations, since a Grexit might just shock Europe out of its crazed economic murder-suicide pact.

If the UK is seen to exploit the current crisis for purely its own ends the danger is that tempers will be lost and negotiations could turn irrevocably sour. The Brussels-based European Banking Federation said Tuesday that banks “have significantly reduced their exposures to Greece, limiting the risk of contagion through the banking system to other countries.” The Greek Finance Ministry says it will open about 1,000 bank branches across the country for three days from Wednesday to allow pensioners without bank cards to make withdrawals — but for a total of just 120 euros ($134) for the week.

While Britain sees its relationship with Europe as a transactional one, we should be under no illusions about the deep emotional commitment to “Europe” among other leaders. Meanwhile, irate depositors called in to television stations to report that some ATMs in Athens had run out of 20-euro notes, leaving them dispensing 50 euro notes only. Cameron must therefore master the art of making ‘pro-European’ demands which happen to coincide with UK interests – a ploy France has played to its advantage for decades Economically, the sense is that the Eurozone and the wider financial system are as prepared as they can be for a Greek default. Sigmar Gabriel, Germany’s vice-chancellor and social Democrat leader said that it must be clear to voters what is at stake. “At the core, it is a yes or no to remaining in the eurozone,” he said. David Cameron told the BBC: “If they vote No, I find it hard to see how that is consistent with staying in the euro, because I think there would be a very significant default and a very significant problem.

On Monday, stocks slid in the wake of Greece’s decision to call a referendum for July 5 on creditors’ bailout proposals and to impose controls on capital. Also as a general rule, any given economy’s system of private banks do not rely on a continuous flow of cash from the central monetary authority to keep their heads above water. An editorial in today’s Frankfurter Allgemeine Zeitung, a leading German daily, argues, “The case of Greece – and it is not only this case – makes it clear that the process of ‘ever closer union among the peoples of Europe’, as stated in the EU Treaties, is not a given.

Most of the time, the underlying economy in question is more or less healthy, providing the banks the necessary investments and the government the necessary tax revenue to function properly. Spain’s unemployment is nearly as bad, but then the ECB never cut Spain and its banks off from new injections of capital, and in fact increased those injections even as it kept Greece on a short leash. If, however, the EU redefines itself as a single market, in which non-market areas — such as currency, justice, defence and social policy — are subject to voluntary arrangements, those countries that want political union could have it, while those who do not would continue to cooperate. As with U.S. monetary policy, the way European monetary policy injects capital into its various economies is hardly ideal, but it is capable of basically keeping an economy’s banks afloat — and perhaps even rescuing an economy as a whole.

So the bailout loans from the IMF and the European creditors — along with the attendant demands for austerity — are essentially an outgrowth of European monetary policy: The loans are necessary to whatever degree the ECB and the monetary system fail to cough up enough capital, then the austerity simply sucks more money out of the nation’s economy, further hampering recovery. In fact, economist David Beckworth plausibly argues that the ECB’s failure to sufficiently loosen monetary policy is the fundamental reason the 2008 financial crisis metastasized into an economic collapse in those countries. Greece’s fiscal shenanigans prior to 2008 were real enough, but the just-so stories linking the current economic crisis to those shenanigans are pure moralizing fables. Even Greece’s neighbors, which have endured austerity, have been sufficiently conditioned to see the process as a necessary hazing, and Greece as the malcontent that won’t get with the program.

Conversely, a Grexit, while it will be a horrible economic shock in the short term, will give Greece its own currency again and thus a (relatively) clear path to eventual economic recovery. (Perhaps even a fast recovery.) At this point, a Grexit is unlikely to do serious damage to the rest of Europe’s economy. But if Greece pulls it off, the sheer spectacle will render the unthinkable once again thinkable — both for Europe’s elites, and for Spain and Italy and the rest.

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