Greece’s elections have confirmed the country’s role as the worst pupil in the euro class. It’s now up to Germany to decide whether to ease up on austerity or hold firm and watch Greece leave the euro.
In the May 6 vote, almost 70 percent of Greek voters backed political parties that oppose sticking to the terms of the two recent bailouts. Economists at Citigroup say the odds of Greece leaving the euro in the next 18 months are now as high as 75 percent. Letting Greece go, however, would be a reckless gamble with the future of the single currency.
Greek officials say that if bailout funds are halted, they would run out of money to pay pensions and salaries within weeks. Given that the state power company recently had to be given emergency funding, the lights might literally go out. One response would be to give the Greeks more time. The alternative is to stick with the austerity-plan deadlines and impose more tough love.
Three years into the crisis, it’s clear that markets need to be convinced that Greece, Italy, Spain, and others will be able to pay their sovereign debts, now and in the future. Otherwise, these countries will pay usurious rates that exacerbate the meltdown. A Greek default could cause investors to worry about euro-area support for those countries, triggering bank runs and capital flight.
The ultimate decisions will have to be taken by Germany, the euro area’s unwilling guarantor. Europe’s finances are sound, and it can afford to pay. The best-case scenario would include Germany’s agreement to the creation of some form of euro bond, or to boost demand at home, tolerate more inflation, and give Southern Europe more time to meet fiscal targets. But there’s little sign that the German government or the ECB want to change course.
The rise of anti-European and, in some cases, xenophobic parties in France, Greece, Italy, the U.K., and elsewhere is disturbing. If Germany refuses to bend, then it will, fairly or not, be held responsible for whatever happens next.