The Eurozone seems to have survived, at least for the time being. After keeping the world on tenterhooks for weeks, the Greeks ended up voting for pro-bailout political parties and gave the besieged nation a semblance of stability. Antonis Samaras has been sworn in as Greece’s prime minister at the head of a coalition government formed with the rival party, the Panhellenic Socialist Movement (Pasok), and the smaller Democratic Left. His government will now have to reconcile the demands of the country’s international lenders with the growing frustration of its recession-wracked citizens.
The European leaders had warned that if a new Greek government rejected the bailout, the country could be forced to abandon the single currency. And there was indeed a range of views on the euro across the political spectrum of Greece. The parties had starkly divergent views about what to do with the $300 billion in bailout loans that Greece has been given by international lenders, and about the harsh austerity measures that previous Greek governments had to accept to get the funds. While the radical-Left Syriza and other smaller parties have opposed the bailout, New Democracy and Pasok said that they would keep it in a renegotiated form. The elections results have thus provided some certainty to the global economy.
An exit of Greece from the Eurozone would have been accompanied by a collapse of the domestic banking sector and by steep inflation. More significantly, a Greek exit could have accelerated bank runs in other troubled euro countries such as Spain and Italy, as investors and depositors got nervous that those countries were the next. A total collapse of the currency union would have looked like a real possibility. Now a measure of certainty would return to the Eurozone. But Greece’s election results will provide respite only on one front. Other problems remain, especially as major European economies like Spain and Italy continue to suffer. The dilemma of how to push for economic growth in the Eurozone at a time when all economies are on an austerity drive remains unresolved.
Important lessons
The problems that the Eurozone is facing underline the precarious nature of the European project itself. Despite its achievements in maintaining prosperity in Europe, the EU has been facing problems as it started becoming a two-tier zone of highly performing economies and the laggards on the periphery. The real nature of the Eurozone is clear: from the start, its dominant economy was Germany. In the years preceding the credit crunch, the Eurozone interest rates were set low to suit the German economy. This created a disastrous housing bubble in states like Ireland. Now, to balance strong German growth, the European central bank is raising interest rates at a time when small, indebted economies need them low. The basic problem is simple. The institutional arrangement of the EU had been made in different circumstances: that model needs to be updated. But no one seems interested in broader reform.
The European project is in crisis. Unlike in the past, when the response to crises usually used to be an attempt towards greater integration, this time, few will be buying this suggestion. Instead, a backlash might take place, leading many to question the very utility of the EU. India and South Asia would do well to learn from this crisis the dangers of regional economic integration in the face of massive economic differentials among member States. Until other economies of South Asia emerge from their economic sloth, New Delhi should not push for greater economic integration in South Asia. If India does so, it will be left to manage Eurozone-like crises in the region, should they emerge. And in that case, India would not be in a comfortable position, as Germany is finding out these days.
