“If there is ever another war in
it will come out of some damned silly thing in the Balkans.”
– Otto von Bismarck
An incident in one of the Balkan countries which should have been settled without much fuss grew rapidly malignant and engulfed the entire continent. This was the assassination of Archduke Franz Ferdinand which led to the Great War. Although one would be justified in thinking that it also applies to the current state of affairs. A €20bn cheque to
Greece at the beginning of 2010
with behind the scenes conditionality might have settled matters. Unfortunately
elections in North-Rhine Westphalia along with typical EU bureaucratic
swiftness led to characteristic delay in decision making. By the time the first
inept rescue was mounted, the fire had spread.
Despite two bailouts, one restructuring and numerous masterplans, not only is
in worse shape but it is still at the exit door. A Greek exit may have lost its
horror for those ensconced in a bubble of sanguinity but they are deluding
themselves. Just as before 1914 when massive instability was hidden behind a
façade of economic and political stability, today’s quiescent markets are
covering an increasingly unstable equilibrium.
The oft-repeated refrain is that the European elite will never allow a Greek bankruptcy and exit. All their actions so far lend credence to this hypothesis. This belief has been further strengthened with every red line that has been erased in the misplaced hope that reality will match rosy forecasts. Now, once again a fudge is being created to allow a loan repayment extension and the disbursement of the next €31.5bn aid tranche. This is familiar to the refrain leading up to 1914. It was thought that civilised nations which are economically interlinked can never go to war. Each incident which heightened tensions and made the Great War more probable was dismissed on the belief that the irrationality of mutual destruction could never prevail. No less a person than Winston Churchill thought “…It is too foolish, too fantastic to be thought of in the twentieth century...No, it is nothing. No one would do such things. Civilization has climbed above such perils. The interdependence of nations in trade and traffic, the sense of public law, the Hague Convention, Liberal principles, the Labour Party, high finance, Christian charity, common sense have rendered such nightmares impossible.” One can hear the echoes in the reassuring pronouncements of European leaders today.
More importantly the argument of never allowing a Greek bankruptcy and exit looks at only one side of the problem. In a marriage either party can file for divorce. Of course the EU leaders want to make it work and are trying their best, but the Greeks don’t seem to be so keen on what they perceive as an abusive relationship. Support for anti-bailout parties is growing (including worryingly for extremist parties such as Golden Dawn) and even the coalition government is about to fall apart. Fanning the flames is the non-binding ruling by the Greek Court of Audiors that pension reform is unconstitutional. Despite EU elite’s best efforts,
Greece can unilaterally decide to
exit (i.e. implode). The argument that the majority’s preference for the Euro
over the Drachma will prevent such an occurrence is hogwash. History is full of
cases of unofficial and official dollarization preceding and succeeding
default. Greece can still use the Euro even if it is not in the Eurozone.
Another worrying similarity with 1914 is the inability of leaders to understand the consequences of a trigger event and their gross underestimation of eventual impact. Until the declaration of war diplomats thought that the dispute between
could be contained. Once war was declared in August, all sides thought it would
be a fairly short affair likely to be over by Christmas. Kaiser Wilhelm II
famously told German troops in August 1914 that they would be back home before
the leaves fall from the trees. A disorderly Greek default and exit would not
be an isolated event. First, it would destroy the credibility of the European
elite which has already risked immense amounts of economic and political
capital by successive Greek bailouts. Second, it would likely lead to contagion
as both markets and citizens wonder who is next. Third, it would inflict large
losses on official institutions and European partners making further bailouts
difficult if not impossible.
The argument that a Greek exit would actually lead to austerity relaxation and unlimited bailouts just as Lehman’s failure triggered a surge of monetary and fiscal support is wrong. First, the EU is not the
US and hence
the speed of decision making cannot be the same. Second and more importantly,
political positions which have been taken and conveyed to voters have
solidified over the course of the crisis. Each concession wrangled out at
summits has increased bitterness and entrenched positions. North and South Europe are more polarised than they were before it
all started in 2010. Therefore a sudden change of direction is unlikely. Just
as alliances and political stances of countries pre-1914 made a catastrophe
inevitable, so too will current irrational politics contribute to a cataclysm.
Finally, the post-Lehman financial sector bailout has generated a tremendous
backlash from ordinary citizens. A corrupt elite has been seen to be favoured
as the recipient of bailout money. As pro-EU opinion ebbs away in countries
a multiple sovereign bailout to “save the system” is unlikely to fly. This is especially
so since public opinion in the donor Northern European countries is shaped by
the caricature of the “lazy” southerner. If the latest fracas over the EU budget is anything to go by,
countries aren’t going to sign blank cheques when their own economies are on