I have spent only one day talking to parliamentarians, journalists, and academics — the elite “europeanist” Germans who you would expect to support the Euro and EU.
They do so, but with surprising trepidation. They are worried about Greece, of course, but not only Greek’s fiscal condition but the anger that Greeks express toward Germany. (One said even vacationing in Greece is difficult for Germans because he felt so unwelcome!) Of course, they recognize that many Germans have contempt for Greeks, blaming the latter for profligacy that was encouraged by Greek leaders and by European banks. In short, the focus on fiscal rectitude and lectures on “bad behavior” have only increased intra-EU anger and resentment without solving any fundamental problems.
The onus is on leaders to remind their constituents of the benefits the EU and Euro have brought, and the need to hold onto these institutions. Greece will have to default (and has sort of said it would agree to painful austerity measures under a new unity government if its debts are reduced), but as I have said, it has to be an orderly default, and done to keep Greece in the Euro system, to avoid panic and even worse chaos.
But for any of this to work, there needs to be a shift from the language of blame to the language of responsibility. Greeks will not accept severe austerity just to bail out European banks and bondholders, but I think they will accept some austerity if it is part of a package to keep Greece in the Euro.
How much austerity is enough? I think the current package imposes too much pain on Greece and not enough on bond-holders; but it can always be renegotiated after the December tranche is received.
So here is the hope for today: Merkel and Sarkozy congratulate Greek leaders on their efforts to join together to support the bail out package; the Greek population accepts the coalition government and its actions to stay in the Euro; after the upcoming election a new government renegotiates a less austere settlement with creditors.
Unfortunately all this can be undone by too much austerity. The latest news is not good — German exports to its European partners are falling. Yet what else could be expected when Germany tells them all to adopt austerity? New ECB leader Mario Draghi has cut EU interest rates, but this will not do the job.
And in a way, Greece is already looking like old news — the panic is heading toward Italy, where bond yields are approaching 7%.
The agreement in Greece is good news, but needs to be butressed by expansionary fiscal policy elsewhere in the EU. If all EU members join hands in embracing austerity, they will contract Europe’s economy, make debt payments unmanageable for Greece, Italy, and Portugal, and all go down together.
This is NOT necessary, but will require a shift in vision and policy to avoid.