“Launching the single currency marks a turning point for Europe and is crucial to stability, high growth and employment,” declared Tony Blair, then UK Prime Minister, in March 1998. “The euro’s opponents are disheartened as their predictions of chaos and disaster haven’t materialized,” observed former Conservative Chancellor Kenneth Clarke in October 2002, as British euro cheerleaders, many disgracefully opposing a referendum, were still pushing us to join.
“The euro is a protection shield against the crisis,” claimed then EU President Jose Manuel Barosso in February 2010, the Portuguese Maoist-turned-Communist-turned-Brussels-careerist seemingly unaware that sovereign bond yields were already flashing red across the eurozone “periphery”. The likes of Spain, Portugal and Greece were struggling to remain solvent, their national balance sheets already weak from years of over-spending, then crushed by the gargantuan losses of hubristic, politically-powerful banks in the aftermath of the 2008 sub-prime collapse.
“This station was reopened not by the government, but by the struggles of its employees,” said Greek prime minister Alexis Tsipras on Thursday. “It’s a celebration of democracy”.
Writing from Athens, it’s hard to miss the sense of defiance felt by many Greek people, coupled with grim satisfaction. Having been closed as part of the International Monetary Fund’s (IMF’s) austerity drive two years ago, the Greek state broadcaster, ERT, has just gone back on air. “Today we must all be happy and look forward with optimism,” said Tspiras, as he visited the station, taking to its airwaves to note that “fair struggles are eventually vindicated”.
There is no chance whatsoever this turbulent Greek drama is reaching any kind of denouement. There are many more acts to come. With unemployment now at 27pc, and youth unemployment above 50pc, most Greeks view their predicament as a tragedy.
To outside observers, not least Greece’s international creditors, another description might be farce. Whatever your perspective, what’s happening in Greece is surreal. By last Friday, the radical-Left Syriza government was supposed to have stumped up €300m (£219m) of the €1.6bn it owes the International Monetary Fund before the end of June.
“It is extraordinary that the fundamental economic problems of a Europe starving and disintegrating before their eyes, was the one question in which it was impossible to arouse their interest,” wrote John Maynard Keynes in his polemical classic, The Economic Consequences of the Peace. Keynes was referring to “the big four”, the leaders of main allied powers that had defeated Kaiser Wilhelm’s Germany during World War One – including British Prime Minister David Lloyd George. A Treasury official at the negotiation of the 1919 Treaty of Versailles, a 36-year old Keynes then resigned in disgust, to rapidly write one of the most influential books of the 20th century.
The terms of the Treaty were far too harsh on Germany, Keynes argued. The leaders of America, Britain, France and Italy were imposing massive financial penalties to appease their compatriots, he said, that crushed Germany’s ability to recover. “Reparation was their main excursion into the economic field,” Keynes boomed, in a work that became an instant bestseller. “They settled it as a problem of theology, of politics, of electoral chicane, from every point of view except that of the economic future of the state whose destiny they were handling”.
Global equity markets ended the week on a positive note, buoyed by signs of progress on EU debt talks with Greece and a glimmer of East-West rapprochement at the Minsk summit. Stocks rallied on both Thursday and Friday, with investors’ risk appetite rising as German Chancellor Angela Merkel shook hands with, and then smiled at, Greek Finance Minister and Negotiator-in-Chief Yanis Varoufakis. That came alongside a Ukraine ceasefire deal – again, brokered by Merkel – which pushed European shares and bonds higher, amid hopes of easing tensions between Russia and the West.
Then we had news of better than expected eurozone growth during the fourth quarter of 2014. The combined economy of the 19-country currency bloc expanded 0.3pc during the final three months of last year, reported Eurostat, with GDP rising at an annual rate of 0.9pc. This improvement was led by a 0.7pc increase in German national income, compared to just a 0.1pc expansion the quarter before. There were also indications of stronger growth in some “periphery” member-states, with Spain and Portugal notching-up figures of 0.7pc and 0.5pc respectively.
So, the gloves are off. Anyone who thought negotiations between the new radical-left Greek government and its creditors were going to be conciliatory, or even rational, must think again. It’s only a few days since Syriza’s seismic election victory and the installation of Alexis Tspiras as Prime Minister. Yet discussions over Athens’ €350bn (£240bn) debt mountain – owed mainly to other eurozone governments, the International Monetary Fund and European Central Bank – have already turned ugly.
Greece and its official creditors are now issuing full-blooded threats and counter-threats, regardless of the impact on financial markets. The Athens Stock Exchange endured single-day double-digit percentage falls last week. On Tuesday, Greek banks, effectively controlled by official foreign creditors, lost over a quarter of their value.
Some 10 million Greek voters went to the polls yesterday, in an election with big implications for the future of monetary union. Even if Greece stays in the single currency, after choosing a party determined to defy the European Central Bank, negotiations over bond repayments between Athens and Frankfurt will be extremely hard-fought. The upcoming rhetorical slugfest, whatever the outcome, will have ripple effects across other “peripheral” members of the 19-country currency bloc which could send global bond markets haywire.
This Hellenic election holds big significance for Britain too. Ahead of our general election in May 2015, fears of renewed eurozone turmoil, which this Greek vote could spark, will bolster eurosceptics across all parties. That could lead to an earlier vote on UK European Union membership.
The German government is stuck on the horns of an extremely nasty dilemma. Berlin’s decision will go a long way towards determining whether or not we endure serious instability on global financial markets over the coming months. The future path not just of the eurozone but also the UK and, in fact, the entire world economy will be impacted significantly by Angela Merkel’s next move. The German Chancellor, moreover, has just days to make up her mind.
Is Berlin to permit full-scale quantitative easing? Will Germany’s coalition government allow money created ex nihilo by the European Central Bank to be used to buy the sovereign bonds of otherwise insolvent eurozone nations? While this is an arcane,technical question, the real-world implications are huge.
What can we expect in 2015? A stronger dollar, as the US economy continues to expand – albeit on ever more borrowed money and an over-hyped stock market? Weaker sterling, perhaps, as the UK recovery remains patchy and our trade deficit keeps pulling down the pound?
How about a partial oil price recovery, as growth across energy-hungry emerging markets once again outstrips the West? Or maybe an interest rate cycle reversal – with America’s Federal Reserve raising borrowing costs at least once over the next 12 months, followed by the Bank of England?
“It sounds far-fetched, I know,” I wrote in this column in December 2007. “But the ultimate victim of this sub-prime crisis could be nothing less than the single currency’s existence”.
Reading it today, the above statement seems pretty reasonable. Many mainstream analysts now recognize the huge stresses imposed by the on-going credit crunch could yet see monetary union break up, with at least one country leaving. To argue otherwise, certainly in Anglo-Saxon company, is to risk appearing in denial.