It All Depends on Greece
According to London’s Financial Times today, “Senior European leaders are attempting to turn the Greek repeat national election next month into a referendum on the country’s membership of the euro”.
The hope is that pressure will win over Greek voters to support tough bailout conditions.
Complicating things is, outside Germany, Europe’s economies are in a world of hurt. Just two days ago GDP reports from three more eastern European EU countries showed them in recession.
There is little good economic news on Europe’s horizon. Its a tipping point for another global recession.
Throughout the world everyone is asking:
- What is the future of the euro and the EU?
- Will they survive the storm or will the whole thing fall apart?
The answer is… it all depends on Greece.
The Greek Elections
The May 6th Greek and French elections were a referendum on austerity as the way to save Europe’s sinking economic ship. Not surprising, in both elections austerity was rejected by suffering voters.
In the case of Greece the vote was so fractured between anti-austerity parties that a new government could not be formed. As a result, outgoing Prime Minister Lucas Papademos was forced to form a caretaker government under Panagiotis Pikramenos to conduct new Greek elections.
Few now remember that Papademos is one of a new class of technocrat European leaders. They were touted as Europe’s saviors after traditional politicians failed their economies. He was rejected in the Greek election.
New elections will be held June 17th, 2012.
The Greek Memorandum
Just two year’s ago Greece signed an all-important agreement now simply called “the memorandum” where it contracted to make certain economic and financial policy changes as a condition of bailouts from the ECB, IMF and World Bank. To this point, it has failed to do so.
May 6th’s election clearly shows the electorate has no desire to meet those conditions. Greek voters want their cake and eat it to. They want the desperately needed bailout money to keep the country afloat, but do not want to pay the price for getting it.
Europe is caught between a rock and hard test case.
In Steps Hollande
Socialist Party leader Franςois Hollande was swept into power in France on May 6th on an anti-austerity platform.
In his first ever meeting with German Chancellor Angela Merkel they were all smiles. They announced that keeping Greece within the EU and using the euro as its currency is their top cooperative priority.
The problem with that is, they are on diametrically opposed sides on how to do that. The Merkozy era is dead. Merkel and European finance ministers remain committed to “the memorandum”. Hollande wants Europe to “allow the Greeks to find solutions“. That’s his euphemism for throwing out “the memorandum”.
The Greek Crisis Deepens
In the meantime, the situation in Greece continues to deteriorate.
Making headlines this week is an accelerated exodus of currency out of Greek banks and out of the country as uncertainty over Greece’s future mounts. Greeks withdrew €700 million from the country’s banks on Monday. There are about €1.2 trillion in total assets in Greek banks.
It has not evolved into a full fledged run on banks yet but it is a long time until June 17th. Folks are worried about losing what little they have left.
The ECB has already suspended normal liquidity support for certain Greek banks fearing its own losses.
The IMF earlier delayed a €1.9 billion payment of desperately needed bailout funds to Greece and now says it will delay further review of Greek bailouts until after the June 17th elections.
It is consensus opinion among European leaders and EU finance experts that Greece will suffer a disorderly exit from the euro and the EU without the bailouts. There is no mechanism in place for a country to exit either the currency union or the EU itself.
There is growing fear if that should happen then there will be further pressure on Spanish and Italian bonds that will put their economies in jeopardy as well. That could lead to a contagion that would be Europe’s economic Little Big Horn.
If that happens then world recession is likely.
So it all comes down to this… it all depends on Greece!