Has the Eurozone Crisis Become a New Global Financial Crisis?     Print Email

As the Greek financial situation continues to deteriorate by the day, it is becoming increasingly likely that the threat is now posed not just to Greece but to the eurozone as a whole. By extension, there is now increased speculation that the United States and other global financial players may ultimately have to play a role in shaping a painful adjustment for the EU’s increasingly fragile financial credibility.

In looking for the causes (and some clues to a solution) of this dire situation, there is certainly enough blame to go around. The main culprit is Greece and its longstanding inability to bring its sovereign debt under control, of course. But other EU governments long turned a blind eye to such fiscal irresponsibility because these countries, too, wanted to bend the EU rules themselves, rather than take politically unpopular austerity measures. (Only one of the eurozone’s 16 member states meets the group’s stated requirement that national deficits not exceed 3% of GDP.) And then, too, there’s the “Goldman Sachs” culture that spread the global financial meltdown from the United States.

What is striking, however, is Europe’s muddled response to a crisis that demands quick resolution from the global financial markets. Each step toward additional support for Greece has appeared to be too little too late. German Chancellor Angela Merkel’s reluctance to embrace the EU/IMF rescue package for Greece has further complicated matters, but accurately reflects current German public opinion. She cites the need to drive a firm bargain with profligate partners such as Greece, and she cites the domestic political pressures opposed to spending German money on a nation that has cheated – with arguments such as “German savings could end up paying for better pensions for Greeks than for Germans

The irony in Germany’s recalcitrance is that it has unwittingly served to worsen the crisis. Greece may be forced to default – an outcome that would ruinous for German (and French) banks that hold so much Greek debt. The contagion has already spread to Portugal and Spain, a country with an economy five times the size of Greece’s.

As the de facto leader of Europe, Germany, it can be argued, should assume the extra burdens and extra responsibilities required to preserve the group that Germany now leads – the eurozone, which is the economic core of the EU. (Historically, the U.S., as the leader of the West, has always assumed the lion’s share of the burden of defense of the West. Similarly, Saudi Arabia traditionally absorbs more than its share of any cutbacks in oil exports needed to preserve the oil cartel, which profits the kingdom more than any other oil-exporter in the long run.)

Overnight, global financial markets have “repriced the risk” of dealing with large parts of Europe, notably southern European countries – the PIGS (Portugal, Italy, Greece and Spain). But the problem is not confined to those countries that are no longer “investment grade.” Suddenly, the debt crisis has metastasized into an existential threat to the eurozone’s ability to function in a crisis. The new reality is perhaps best described by Simon Johnson, a British American economist and former chief economist of the International Monetary Fund. As he writes today:

In this sudden shift, the crisis now “is about the fundamental structure of the eurozone, about the ability and willingness of the international community to restructure government debt in an orderly manner, about the need for currency depreciation within (or across?) the eurozone. It is presumably about shared fiscal authority within the eurozone – ie who will support whom and on what basis?”

“The idea that we can leave this to the Europeans to sort out is an idea of yesterday,” according to Johnson, author of a new, highly regarded book on the global financial crisis entitled “13 Bankers."

Of course, there will have to be searching debates – and perhaps wrenching action such as a departure of Greece from the eurozone. (Did Chancellor Merkel open that door a crack today when she said Greece’s joining the eurozone was probably a mistake?) But the wrenching and the reordering will only be harder to manage if the crisis is allowed to fester. Already today – as opposed to yesterday – Europe now has to contend with a new fact: it emerged overnight that Greece will need not just an immediate bail-out of $60 billion but a three-year bail-out of as much as $150 billion.

"It is perfectly clear that the negotiations with the Greek government, the European Commission and the IMF need to be accelerated," Chancellor Merkel said after meeting with Mr. Strauss-Kahn, Managing Director of the IMF, in Berlin today.

Everyone is losing the levers of control by further delay in rescuing Greece now, albeit temporarily with a bridging loan. Then it will be time to deal with the future, perhaps with an international conference of Greece’s creditors to reinforce the eurozone’s failed fiscal discipline.