The surprising electoral success of a stridently anti-austerity party in Greece has reignited fears that the country may ultimately leave the Eurozone, which could precipitate a severe market reaction amid fears of contagion. While it’s impossible to say at this point whether Greece will stay or go (I suspect the former), the election also highlighted a growing trend of popular resistance against both austerity and its main proponents—be they the hawkish Germans or the old guard like France’s ousted president, Nicolas Sarkozy. In its darkest form, this resistance underpins the growing popularity of leaders and parties on Europe’s extremist fringes, echoing the nationalist and xenophobic dynamics of the 1930s.
George Bernard Shaw once quipped that “if history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience.” What we’re seeing in the latest European flare-up are clear warning signs. Europe is headed down a dangerous path and needs to change direction. The German-led insistence on massive spending cuts in return for rescue funding won’t work; it’s counterproductive and, as the recent Greek and French elections showed, political poison. I think of it as the difference between telling my profligate nephew to pay his credit card bill before he goes off to party, and telling someone to pay his or her credit card bill and then starve.
The good news is that there is a playbook for financial crises, if only Europe would follow it. The Continent needs greater policy accommodations, likely including another restructuring of Greek debt, a recapitalization of the Spanish banking system, support from the European Stability Mechanism and European Central Bank to preserve Spanish and Italian market access, and the prospect of some type of Eurobond, which would maintain access to markets for those countries suffering the most.
Fortunately, we’ve been hearing more and more conciliatory talk about the need for pro-growth measures in the periphery—and potentially even a bit more inflation in Germany to help peripheral competitiveness. Still, the Germans, Finns and others remain outwardly committed to punishing the fiscal “sinners” of the Eurozone, a view that not only denies the codependent nature of the debtor-creditor relationship, but could precipitate a damaging showdown with austerity’s opponents in Greece and elsewhere.
I’ve said all along that there needs to be more Europe, not less. The prospect of a Greek exit from the Eurozone and the specter of rising extremism, perilous though they are, may ultimately help bring “more Europe” about. Politicians seem almost universally incapable of doing what needs to be done in a crisis until conditions become so bad that action is unavoidable. If the events now unfolding help get Europe to that point, perhaps policymakers and voters will awaken their inner pragmatists and avoid sleepwalking into another depression. Of course, the more likely outcome is that policymakers will continue to do just enough to avoid the worst, but not enough to put the crisis behind them once and for all.