Euro Wars: Is Syriza a New Hope or will the Troika Strike Back?
A long time ago, in a galaxy far far away…
It is a period of civil strife in Europe. Radical Left-wing politicians, striking from Greece, have won their first victory against the evil Troika.
Emperor Merkel controls things from afar with the aid of her minion Darth Draghi, whose secret weapon has just been unleashed: quantitative easing, a tired economic doctrine with enough power to destroy an entire planet.
The Rebellion is now 100 days old and its leader, Alexis Tsipras, is seen a new hope for many across the EU.
He is joined by adventurer Yanis Varoufakis, whose Marxist ideals are rusty and shaky but may just outrun the Troika’s deadlines.
Only, in the real world of finance and sovereign debt, it’s just not quite as black and white as all this.
After 100 days in power, Syriza’s promise of ending austerity has come up against a cold hard reality: how can it meet its debts and stay in the euro? Promises of restructuring the economy are one thing but delivering on this and spurring growth is harder. Talks with its European creditors have so far been fruitless, and many now legitimately question when Greece will leave the eurozone.
It’s not looking pretty for Greek banks. Deposits dropped to a ten-year low in February as some €8 billion was withdrawn by nervous customers. Worries about the country running out of money have roiled bond markets - euro area bonds suffered their worst month since 2013 in April, while the International Monetary Fund (IMF) is prepared to cut off support for Greece.
Nevertheless, on Wednesday, May 6th, Greece confirmed it met a €200 million payment to the IMF to stave off the immediate threat of a default. But more deadlines loom and there is no guarantee that a deal will be struck.
Varoufakis has not exactly been cozying up to his Eurogroup colleagues either, which makes matters all the more difficult.
But while talk is focused on Greek debt and repayment deadlines, there could be a bigger threat to the euro than Varoufakis’s brinkmanship. In Star Wars it’s the Jedi who are “slavishly devoted” to an outdated creed; today in Europe it’s Germany’s passion for saving that is its weakness.
Germany’s current account surplus, now above six per cent of GDP for a fifth consecutive year, is endangering eurozone stability. The EU’s Macroeconomic Imbalance Procedure means Germany should face infringement proceedings, but the Commission would be brave to take on the Bundesbank. Germany was warned by Brussels last year but nothing more was done. The IMF said last July that the country’s budget surplus was economically destructive for struggling eurozone countries.
Simon Tilford, from the Centre for European Reform, says: “Germany’s surplus is a formidable obstacle to a eurozone recovery. Rebalancing would boost the eurozone economy by raising inflation and making it easier for other eurozone countries to service their debts, including those debts owed to Germany.”
The surplus is not a one-off. It’s the result of a saving dogma, backed up by policies geared toward export and production, that stifles demand and holds back domestic investment.
“To a large extent, Germany’s surplus reflects political choices: the government’s drive to balance the budget; reforms that hit labour’s bargaining power; a highly unequal distribution of wealth; too much taxation of consumption and too little of corporate profits, wealth and property,” says Tilford.
The analogy to Star Wars rings true - big countries like Germany seem to ride roughshod over EU rules, while tiny nations like Greece are forced into crippling bailout programmes.
The threat to the eurozone galaxy comes not from Greece, but from Germany’s slavish devotion to an economic creed that creates a dangerous imbalance.