Hoover Daily Report

Europe’s Headaches Are Just Beginning

via Wall Street Journal
Tuesday, July 7, 2015
The impact of the cultural obstacles created by the euro’s implementation  is on
Image credit: 
iStockphoto

Forget about a Greek exit from the euro, forced or voluntary. With a resounding vote against their creditors’ bailout conditions in Sunday’s referendum, the Greeks are sitting tight, and Greece’s Prime Minister Alexis Tsipras is still winning his country’s stubborn battle against Europe.

No matter that last week Athens defaulted on its loans from the International Monetary Fund. No matter that the European Central Bank was contemplating freezing liquidity assistance to the country’s teetering banks—a move that would have killed the banks and caused the cash-based economy to collapse. The Greeks still aren’t going anywhere.

Kicking Greece out of the euro might have soothed Germany’s Chancellor Angela Merkeland France’s President François Hollande. It might also have pleased Jean-Claude Juncker, the president of the European Commission, who supported Athens at first only to realize that he was being taken for a fool.

Other euro countries, such as Portugal and Spain, which have implemented austerity and reform measures in exchange for loans, might also have taken heart from a Greek exit.

But that still wouldn’t have gotten rid of the culprit. Greece would still have remained in the European Union—only the spigots would have changed. Outside the euro, Greece would no longer have access to the European Stability Mechanism, which has already showered €130 billion ($143.57 billion) on Athens, more cash than on any other “Club Med” member. Nor could Athens return to the vaults of the ECB.

But as an indigent member of the EU, Greece could still claim billions from the “structural” and “cohesion” funds that shell out billions to the poorer regions of Europe. Athens could also draw on the EU’s balance-of-payments scheme, which delivers medium-term financial help to non-euro nations.

The threat of exit has always been as hollow as a cocked but empty gun. Weakness is strength, to recall George Orwell’s Newspeak. As Napoleon once pleaded, “God, please let me fight against coalitions”—highlighting the strategic advantage of the one who is free to act on its own, while the many must haggle and compromise to bridge their conflicting interests. Coalitions always break up.

For months, Mr. Tsipras had been staring down the ECB, the EC and the IMF, refusing to budge. It was Mrs. Merkel who had insisted on including the Washington-based IMF in the negotiations, because she didn’t trust the mild-mannered European institutions to hold the line against Greece.

Then last week, just before the Greek referendum’s thudding “no,” the IMF bolted from the hardline-coalition by validating Athens’s “strength-through-weakness” gambit. The IMF figures that Greece needs a new three-year bailout worth around $67 billion. The existing debt should be restructured by extending maturities to 40 years from 20. Or make that forever—what’s the difference. Finally, let’s think about a haircut to creditors in the area of $60 billion.

You have to admire Mr. Tsipras: He kept his nerve and won. He will get new cash plus debt restructuring, and he will generously swear to be good by promising a little reform here, a little budget discipline there.

Who lost? Europe did. If Athens can pull this off, why not Lisbon and Madrid? Why should Paris and Rome defy their vested interests at home in the name of reformist virtues when the Greeks get to defy mighty Europe?

Europe as a whole, weighed down by so many long-term handicaps, has lost its bounce over the past 45 years. Eurozone growth is stuck in the 1% range. The overall EU growth rate has been dropping by half a percentage point every decade since the heady ’70s. Europe’s share of global GDP has declined by 9 points since 1970. Investment and productivity have dwindled as well.

Given that the Greek economy is just 2% of EU GDP, what’s the big deal? Europe can well afford to keep Greece on the dole forever. But it can’t afford to set a bad example by rescuing Greece for a third time in five years. Almost all of Europe needs what it has failed to impose on Athens: cutting overspending and implementing market-based reforms.

If Greece is the future, Europe might end up in the past.

Mr. Joffe is the editor of Die Zeit in Hamburg and a fellow at Standford’s Hoover Institution and Institute for International Studies.