With Standard & Poor's lowering Greece's sovereign bonds to junk status this week, and Portuguese debt downgraded as well, Europe started to fear a domino-like contagion that could spread to Spain, Italy, and other eurozone countries that face high debt, slow growth and big budgets. The EU and the International Monetary Fund (IMF) have realized that they cannot afford "business as usual," says CFR Europe expert Charles Kupchan, and they were scrambling to pull together a massive rescue package. But political resistance to a bailout is strong, particularly in Germany, Kupchan notes, and the crisis also raises larger questions about "whether Europe is up to the task of maintaining its coherence and unity."
The world markets on Thursday seemed to improve with the word from the IMF that it was going to extend very large loans to Greece over three years. What do you think the overall situation is now regarding Greece and the European Union?
The crisis seems closer to its endgame since over the last several weeks it's become more and more clear to the European Union and to the IMF that the neither the Greeks nor the European Union can afford business as usual. The initial reaction to the worsening fiscal situation in Greece was to back away and an "each to his own" reaction. But European leaders have realized that the Greece crisis is getting more precarious by the day, and that it is having a spillover into economies in the EU, including Spain and Portugal. Their borrowing rates rose sharply over the course of the last week. The realization reached this week is that if very serious and very prompt steps to intervene in Greece were not taken, then Greece could default on its debt and this could turn into a major international crisis that ripples across not just the EU, but perhaps beyond.
Obama has grown somewhat impatient with the inability of Europe to get its act together. And the delay in acting on the Greek crisis is simply fueling the flames of those in Washington who are saying to the Europeans, "You need to become a more effective actor."
Is this similar to the crisis we have had in the United States?
It's different in the sense that the EU is a hybrid polity. There is a single currency within the eurozone, but there are no harmonized tax policies or accounting policies. So one of the problems that's been taking place is that there is a common currency within the eurozone, but the Greeks have not been keeping their house in order. To some extent, they've been cooking the books about the scope of their deficits. There isn't a harmonized approach toward monetary stability within the European Union. In that sense it's much more complicated than in the United States, where issues are centralized and controlled by the Federal Reserve, by the United States Treasury, and by a central government. So it's an easier problem to handle in the United States. Another key difference is that in the United States, we were talking about the potential default of banks, that there were certain banks that were "too big to fail." In Europe, they're now talking about the potential default of countries: "countries that are too big to fail."
Going back to the nineteenth century, Greece has always seemed to be courting economic disaster, it seems.
It's safe to say that Greece does not have a good track record in terms of fiscal management. Today the problems stem from a country living beyond its means, a country that has a very shoddy tax collection system, and that has a pension system and a pay system for civil servants that is too generous. A very important part of the bailout that is being put together is that Greece has to implement its own austerity measures. It's precisely because there is a sense that Greece has been profligate, that in Germany--a country that is known for husbanding its resources, for keeping its inflation low, and for high rates of saving--the average German is saying, "Here are the Greeks, living irresponsibly, why should I see something come out of my paycheck or my daily standard of living to bail them out?" That's one of the reasons Chancellor Angela Merkel has been so hesitant to move. She faces a population that is about 75 percent opposed to the bailout, with some important elections coming up on May 9 in the state of North Rhine Westphalia (NRW).
Why are those elections important?
It's a major German state with a very large population. It has been to some extent a bellwether of the new German coalition government between the Free Democrats and the Christian Democrats, and Merkel does not want to make a decision that's deeply unpopular as this regional election is taking place. It could end up being a bit of a backlash against her. She faces the same kind of dilemma that other world leaders have had to contend with. It's comparable to the problem faced by President Bill Clinton in the late 1990s during the Mexico peso crisis, where the American public was quite opposed to intervention but Clinton basically realized that this crisis would only grow deeper over time. He said, "We can pay them now or we can pay them later, but it's gonna be much cheaper today." And Merkel is realizing that, but she's having a tough time selling it to her coalition and to her domestic constituents.
Is Merkel in trouble with these elections?
These are for the state legislature, but it also affects the composition of the upper house of the German parliament, the Bundestag. So this is not an election that could cause the dissolution of Merkel's governing coalition, but in Germany these kinds of regional elections--because they are seen as referenda on how the ruling coalition is doing--are very important political events. They are more important than a state election in the United States.
There seems no mood of national austerity in Greece: The situation isn't helped by having so many strikes by public servants, who are demanding that they don't lose their jobs or lose their benefits.
In Germany--a country that is known for husbanding its resources, for keeping its inflation low, and for high rates of saving--the average German is saying, "Here are the Greeks, living irresponsibly, why should I see something come out of my paycheck or my daily standard of living to bail them out?"
The Greek leaders realize that it's time to tighten the belt and bite the bullet, but the Greeks are not going quietly into the night. There have been regular protests, and there's a huge amount of resistance to the kind of austerity measures that the EU and the IMF are making a precondition for the loan that's being considered. But part of the reason that the Germans and the other EU members are so strict about this is that when the euro was adopted by the European Union, the Germans in many respects saw it as the replication or the export of Germans' cautious approach and fiscal discipline, keeping inflation low and setting rigid standards for what kinds of deficits and debt eurozone members could run. And now we see many countries casting those constraints to the wind. So the system is, to some extent, broken right now. It needs to be fixed. This bailout is very necessary to stabilize the situation in Greece, but it's the tip of the iceberg when it comes to a broader set of fixes on how the eurozone functions.
There seems to be major concern that this may spread to Spain, a much more mature economy than Greece. What's the situation in Spain?
The Spanish economy hasn't suffered from the same poor management as the Greek economy. There isn't such a huge black market and nontaxable markets as the ones that exist in Greece. What you've seen in Spain is a more secular downturn, particularly in the construction sector. What that means is that there has been declining tax revenue, increasing debt, and that has raised questions about whether countries like Spain and Portugal are seeing their fiscal imbalances grow, moving in the direction of ending up looking like Greece.
The markets have reacted to that by making it more expensive for Spain and Portugal to borrow money, and that simply exacerbates the problem by increasing the difficulty of paying off debts. There is one other issue that is important here, and that is that the reaction of Europe to the Greek crisis is part of a much bigger question today about "whither Europe" and whether Europe is up to the task of maintaining its coherence and unity. The Lisbon Treaty, which was passed last December, was certainly a step in the right direction. But the new institutions, the president of the council, and the new high representative for security are starting out slowly--to put it gently.
You haven't heard from them during this whole crisis!
No. And that's partly because Catherine Ashton, the high representative, doesn't deal with these kinds of issues. But it's also because we really have seen a series of blows to what you might call "the spirit of European unity." The Germans have been much more focused on Germany than Europe, as made clear by Merkel's initial reluctance to bail out the Greeks; the Belgian government just collapsed, and they will take over the rotating presidency at the end of June. So here you will have as the main country guiding the EU a country that is in political turmoil. And now we are about to see elections in the United Kingdom that could produce a Conservative government that is openly skeptical of Europe, or it could produce a hung parliament where Britain is to some extent not providing any leadership. So this Greek crisis is really part of a broader set of concerns about the health of the European project.
Earlier in the year we had this minor flap when President Obama said he wouldn't go to a European-American summit.
There was supposed to be a United States-EU summit in Madrid. Spain now holds the rotating presidency; they will hand it off to the Belgians. Obama has grown somewhat impatient with the inability of Europe to get its act together. And the delay in acting on the Greek crisis is simply fueling the flames of those in Washington who are saying to the Europeans, "You need to become a more effective actor." It's particularly noticed in the United States today because we are having our own economic problems. We are strategically overextended in Iraq and Afghanistan, and that creates a political environment in which Washington is very sensitive to what its allies are doing--or in this case, not doing. So that's why you hear a certain amount of impatience in Washington with Europe.