Since the eurozone crisis started more than two years ago, skeptics have been quick to dismiss the simmering problem as much ado about nothing.
Shoot, they’re just a bunch of socialists getting their comeuppance, right? And the Greek economy is insignificantly small, at around $300 billion. That’s worth just 2% of the U.S. gross domestic product.
While the financial markets have been jumpy over the issue since it started, the slow, drip-drip deterioration of the situation across the Atlantic has started to bite in very real ways. The unemployment rate is rising again here at home, factory activity has stalled around the world, and much of Europe has fallen into a new recession.
According to Bank of America Merrill Lynch economist Ethan Harris, there are “growing signs of a synchronized global slowdown.” From China to India, Hong Kong and Australia, GDP forecasts are being slashed as global trade slows. Harris sees “a significant risk of a global recession” later this year or in early 2013.
As a result, something that once seemed innocuous and maybe a little funny has assumed a deadly seriousness. There’s a key date to mark on your calendar: June 17. That’s the date of the next parliamentary election in Greece. And without substantial action between now and then, the situation gets much worse for everyone.
In the context of all of this, the political fabric that binds the eurozone together is fraying badly, as countries and institutions group themselves into two corners.
Troubled nations including Spain and Greece — supported by Italy, France and the European Commission — want more leniency and help as they try to rebalance their economies, address structural inefficiencies, pay down debt, close budget deficits, recapitalize banks and return to growth — all at the same time.
This pro-growth bloc is pushing hard for things like a eurozone bank deposit insurance program (ending bank runs via a eurozone version of the FDIC, the deposit insurance program in the U.S.) using eurozone bailout funds to recapitalize weak banks (instead of making Spain’s government help its banks, which would take pressure off of its budget deficit); and the issuance of “eurobond” debt backed by the entire eurozone (to push down borrowing costs for troubled nations). They also want the European Central Bank to step up its stimulus efforts.
The pro-austerity bloc, including Germany and the Netherlands, wants progress on things like economic reforms, constitutional commitments to balanced budgets and state asset sales before any of this happens. The worry is that cheap money, in the form of ECB loans to the financial system, could unleash dangerously high inflation.
Salvos are being exchanged, and positions are hardening. The ECB is caught somewhere in the middle, with its executive board dominated by pro-growth nationals while the German Bundesbank still wields enormous influence.
You can see who is ahead in this debate in the results of the recent French presidential election, which replaced pro-austerity Nicolas Sarkozy with pro-growth François Hollande. This has changed the balance of power and has emboldened the pro-growth faction.
What we have now is an epic game of chicken spiced with daily doses of rumor and conjecture about who will win.
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