From the Economist: Since the euro crisis erupted in late 2009 Greece has been at or near its heart. It was the first country to receive a bail-out. It was the subject of repeated debate over a possible departure from the single currency (the so-called Grexit) in 2011 and again in 2012. It is the only euro country whose official debt has been restructured. On December 29th the Greek parliament failed to elect a president, forcing an early snap election to be called for January 25th. The euro crisis is entering a new, highly dangerous phase, and once again Greece finds itself at the centre.
The early election is likely to create a political crisis in Greece. What happens beyond that is less clear. Investors seem to be betting that the people of Italy, Spain and France will stick to the austerity that Germany’s Angela Merkel has prescribed for them. It is hard to believe that a Greek crisis will not unleash fresh ruptures elsewhere in the euro zone—not least because some of Mrs Merkel’s medicine is patently doing more harm than good.
Mr Tsipras has recanted from his one-time hostility to Greece’s euro membership and toned down his more extravagant promises. Yet he still thinks he can tear up the conditions imposed by Greece’s creditors. in exchange for two successive bail-outs, he argues that the economy is at last recovering and Greece is now running a primary budget surplus.
A growing economy and a primary surplus may help a country repudiate its debts because it is no longer dependent on capital inflows. But the Greek economy still has far to go to restore its lost competitiveness.
Much has been done to improve the euro’s architecture, with a new bail-out fund, the European Central Bank’s role as lender of last resort and a partial banking union. Moreover, most of the bailed-out and peripheral countries are at last growing again, and unemployment is starting to fall.
Neither Greece nor Europe can afford this game of chicken. Even if the Grexit is safer, it is still perilous and unpredictable. There was a worrying echo this week of the Lehman crisis of September 2008. Then the widespread assumption was that the global financial system was robust enough to cope with the failure of a single investment bank. Now investors are putting their trust in the resilience of unemployment-plagued countries like France, whose president has record levels of unpopularity, and Italy, whose economy has shrunk in constant prices in the first 14 years of this century (even Greece’s GDP is higher now than it was in 1999).
That stagnation points to the deeper reason for caution. The continuing dismal economic performance of the euro zone now poses a big political risk to the single currency. In the short run if creditor countries insist on budgetary rectitude and reject all proposals for further monetary and fiscal stimulus, that performance seems unlikely to improve. Worse, inflation is now so dangerously low that the euro zone threatens to tip into years of deflation and stagnation worryingly reminiscent of Japan in the 1990s. The continent’s leaders have largely failed to push through the structural reforms that could make their economies more competitive. When voters see no hope, they are likely to vote for populists—and not just in Greece.
As 2015 approached, most of Europe’s leaders assumed that the worst of the euro crisis was behind them. The early Greek election shows that hope was premature. Ironically, when a country starts to recover is also when popular discontent often boils over. That message needs to be heeded this week in Berlin as much as in Athens.
