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Europe on the Brink, as Warnings and Counter-Warnings Fly

Alexis Tsipras of the front-running far-left Syriza party in Greece said that continuing on the current path of EU-enforced austerity would send the country to hell. His top rival, Antonis Samaras of the center-right New Democracy party, said that Greece risked a “nightmare” if they didn’t adhere to the agreed-upon reforms and found themselves outside the euro.

So at least both sides aren’t overhyping the upcoming elections a month from now, on June 17. So far, however, the Greek public is not connecting with the warnings of a Eurozone exit, according to the New York Times. It’s logical to assume that a country already in the grip of a major crisis would not be moved by warnings that a change of course would cause a crisis.

For years now, Greeks have been bombarded with warnings about the dire consequences of leaving the euro, and never more so than since the recent, indecisive election that left the country saddled with a caretaker government. But those pronouncements seem to be falling on increasingly deaf ears, and for one simple reason, as one woman explained as she stood in central Syntagma Square:

“We have nothing to lose,” she said. “We have no fear.”

Syriza’s argument is that austerity has failed all over Europe – one aide to Tsipras said that “You have to be a neo-liberal fanatic not to see that it [austerity] has failed” – and they added that they could not be kicked out of the Eurozone because they were an equal partner in it. “No one has the right to say ‘either you accept austerity or leave’,” the aide added. However, Syriza would not pursue a unilateral exit from the memorandum of understanding on bailout terms, aides said.

New Democracy’s argument is that a default, which would probably ensue from rejecting the austerity agreement, would lead to a banking crisis, some manner of exit from the Eurozone and a halving of wages and property values along with a soaring cost of living from higher imported commodity prices.

European leaders seem increasingly confident that they could force Greece out of the Eurozone if they make the choice to reject the bailout terms, and even more confident that the Eurozone would survive that shock. Syriza considers this a bluff. And Paul Krugman argues that the bolstered bailout funds for other troubled Eurozone nations will not help Europe survive a Grexit:

So now what? Right now, Greece is experiencing what’s being called a “bank jog” — a somewhat slow-motion bank run, as more and more depositors pull out their cash in anticipation of a possible Greek exit from the euro. Europe’s central bank is, in effect, financing this bank run by lending Greece the necessary euros; if and (probably) when the central bank decides it can lend no more, Greece will be forced to abandon the euro and issue its own currency again.

This demonstration that the euro is, in fact, reversible would lead, in turn, to runs on Spanish and Italian banks. Once again the European Central Bank would have to choose whether to provide open-ended financing; if it were to say no, the euro as a whole would blow up.

Yet financing isn’t enough. Italy and, in particular, Spain must be offered hope — an economic environment in which they have some reasonable prospect of emerging from austerity and depression. Realistically, the only way to provide such an environment would be for the central bank to drop its obsession with price stability, to accept and indeed encourage several years of 3 percent or 4 percent inflation in Europe (and more than that in Germany).

It’s hard to separate the scaremongering from the reality here, as well as the bluffing from the legitimate expressions of that reality. But much of this could come to a head at the G8 summit which starts today. Germany’s Angela Merkel finds herself in an increasingly isolated position, with all the other powers invested heavily in a growth strategy over this economy-crushing austerity that is pushing Europe to the brink. Not just newly elected French President Francois Hollande, but even US President Barack Obama and British Prime Minister David Cameron, for their own reasons, will be pressing Merkel for stimulus, growth, a higher inflation target or something to end the lead weight of austerity-only policies.

It’s unclear whether any of this will sway Merkel. Germany just announced a decent, though modest, growth in the first quarter. The policies crushing the rest of the continent work fairly well for Germany. And the irrational fear of inflation, along with a moralistic desire to “punish” the peripheral countries for their debt profligacy, still has a powerful pull among the German leadership. But this intransigence could set in motion a true catastrophe, not only for Europe, but the entire world.

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David Dayen

David Dayen