Less than a week after European leaders put a bow on their debt-restructuring plan for Greece, the nation's internal politics have devolved. The prime minister's ruling party is fraying over his call for a referendum on the E.U. debt deal. On November 1, The New York Times asked six experts, "Will the collapse of the Greek government destroy the euro zone?" AEI's Desmond Lachman responded:
Mark Twain famously observed that while history might not repeat itself, it often rhymes. As if to bear him out, economic and political developments today in Greece are bearing an uncanny resemblance to those in Argentina in late 2001. Those developments led to Argentina’s disorderly default and ignominious exit from its supposedly immutable U.S. dollar exchange rate peg in early 2002.
"The euro might survive, but in a form that excludes the troubled countries in the European periphery."
The euro might survive, but in a form that excludes the troubled countries in the European periphery. Mr. Papandreou’s desperate gamble to now call a referendum has to be seen against the backdrop of a Greek economy in virtual free-fall under the weight of I.M.F.-imposed austerity and a country bordering on ungovernability. His highly risky gambit will almost certainly lead to the fall of the Papandreou government, which will compound Greece’s already chronic economic and political woes. If Argentina’s experience is any guide, economic and political collapse will render it all but impossible for Greece to avoid a disorderly default and, in time, a euro exit.
For over a year now, the European Central Bank has been warning that a Greek default would trigger contagion to the rest of the European periphery, including most importantly Spain and Italy. The increase in Italian bond yields to record levels over the past few days — despite E.C.B. intervention and despite the creation of a supposed firewall at the recent European summit — does not augur well for Europe’s economic outlook. This will make it all the more difficult for countries in Europe’s periphery to grow their way out of their chronic debt problems.
Given the enormous political and economic stakes involved, one has to expect a huge effort by the European political elite to preserve the highly successful European experiment of the past 60 years. However, considering the increasing visceral antipathy of European electorates to bailing out the periphery, it is difficult to see how Portugal, Ireland and Spain can be saved from Greece’s path to default. It would seem that the best for which one can hope is the survival of the euro but in a form that excludes the troubled countries in the European periphery.
Desmond Lachman is a resident fellow at AEI