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     Feb 18, 2012

Europe playing with fire
By Victor Kotsev

As discussions about whether Greece should be allowed to default on its debt or be kept on financial life support pick up between European capitals, one gets the impression that the Europeans are playing with fire - the fiery demon of old nationalist hatreds - and are rocking the very boat in which they find themselves together.

On Thursday, the Financial Times reported that a deal for a 130-billion-euro (US$170 billion) bailout, expected to be finalized next Monday, would "contain unprecedented controls on Athens' ability to spend funds" such as "an escrow account that must always contain enough cash to pay Greece's debt for nine to 12 months" and "a permanent and beefed-up presence of international monitors who will attempt to keep real-time tabs on the Greek government's spending decisions". [1]

Other reports are more cautious about the precise parameters of


the deal, which will also involve private investors accepting losses on Greek government bonds. The Economist, for example, points out that "[t]he delays may reflect the brinkmanship that is part of any tough negotiation. Greece is short of cash but not of bargaining chips. Without fresh bail-out money, it faces a chaotic default ... [which] might provoke wider contagion." [2]

Yet the writing has been on the wall for some time now, and the signs have only become more worrying. Ever since, two years ago, the Greek deputy prime minister at the time, Theodoros Pangalos, attempted to lay responsibility for the financial crisis on Germany, blaming the Nazis for stealing the Greek gold some 70 years earlier, extreme nationalist sentiment in Europe has received a new boost - the financial crisis.

The European far-right has been on the rise in the last years. [3] While the crisis isn't the only factor to blame, the latest verbal arguments between officials, which echo sentiments on European and Greek streets, raise eyebrows and testify to just how far things have gone.

Earlier, the Financial Times described a conference call between the eurozone's financial ministers (what remained of a summit that was cancelled, and subsequently postponed for Monday) and its aftermath: "The battle of wills between Athens and its eurozone lenders intensified on Wednesday, with Greece's finance minister accusing 'forces in Europe' of pushing his country out of the euro while his German counterpart suggested postponing Greek elections and installing a new government without political parties." [4]

The proposals of German Finance Minister Wolfgang Schaeuble - echoed to an extent in the outlines provided by the latest Financial Times report on the bailout deal - effectively seek to subvert democracy in Greece. They come in the wake of repeated failures by the Greek government to implement past reforms and testify, among other things, to the frayed nerves of European leaders.

They elicited a quick response also from the Greek President Karolos Papoulias, who earlier on Wednesday had announced that he would give up his annual salary of roughly 400,000 euros in a symbolic move to help his country. Papoulias lashed out against Schaeuble and his Dutch and Finnish colleagues (who allegedly supported Schaeuble's positions on Greece and threatened to veto the bailout deal on Wednesday):
I don't accept insults to my country by Mr. Schaeuble. ... I don't accept it as a Greek. Who is Mr Schaeuble to ridicule Greece? Who are the Dutch? Who are the Finns? We always had the pride to defend not just our own freedom, not just our own country, but the freedom of all of Europe.
On the streets of Greece, meanwhile, the burning of German flags seems to have become something normal. The phenomenon, which in a separate analysis the Financial Times calls "a certain 'renationalisation' of public opinion across Europe", is not limited to the relations between Greece and Germany:
It is visible, for example, in France's presidential election campaign. [German Chancellor] Ms [Angela] Merkel threw her support behind Nicolas Sarkozy, the centre-right incumbent, after France lost the top-notch credit rating still enjoyed by Germany. But the French left yearns to maximise its autonomy in economic policymaking, should it win the election. This sidesteps the reality that Franco-German equality, so central to post-1945 European integration, is, at least in economic terms, a fiction. [5]
While nationalist sentiments, according to most observers, are hardly strong enough yet to threaten the existence of the European Union, the confrontation between Greece and Germany could be symptomatic of worse to come if the financial meltdown is not contained.

Here is, however, where Germany's dilemma becomes apparent: if tough rules are not enforced with Greece, there are a number of countries waiting in the wings for handouts. None are likely to agree to any less than meted out to Athens.

This means two things: firstly, all troubled eurozone countries are likely to request similar "haircuts" as the one private investors are expected to accept on Greece (50% or higher). Secondly, none are likely to agree to any tougher austerity measures than the ones Athens is forced to implement.

The nightmare scenario is a vicious cycle in which countries would keep missing financial targets and needing further assistance. Some could indeed become bottomless pits for German money; worse, by the time Italy comes hat-in-hand, Berlin would probably have gone bankrupt itself.

In some ways, the dilemma today in the eurozone mirrors the main question of the US financial crisis of 2008. Bad behavior must be punished, lest it produce more bad behavior, but not in ways that could endanger the whole system. To put it differently, and to substitute states for investment banks, who is too big to fail, and who is too big to save?

According to the American think-tank Stratfor, precisely this kind of thinking is behind the German proposals - some of which have been in circulation for quite some time. Last month, Stratfor documented another, very similar recent attempt by Germany to effectively interfere in the sovereign affairs of Greece:
The Germans argue that given the failure of the Greek state, and by extension the Greek public, creditors have the power and moral right to suspend the principle of national self-determination ...

The Germans are caught in a dilemma. On the one hand, Germany is the last country in Europe that could afford general austerity in troubled states and the resulting decline in demand. On the other hand, it cannot simply tolerate Greek-style indifference to fiscal prudence. Germany must have a structured solution that to some degree maintains demand in countries such as Spain or Italy; Germans must show there are consequences to not complying with the orderly handling of debt without default. Above all, the Germans must preserve the European Union so they can enjoy a European free-trade zone. There is thus an inherent tension between preserving the system and imposing discipline.

Germany has decided to make an example of the Greeks. [6]
The big problem with this rationale, as Stratfor points out, is that nations are fundamentally very different from corporations. To take this point further, numerous attempts to organize the lives of human beings according to the logic of markets have failed miserably in the past, and this current one is likely destined for a disastrous end as well. In an alternate nightmare scenario, the European leaders risk fanning the flames of ethnic hatred and mistrust which were buried, but never quite put out, by the common European project.

How much damage that could do is impossible to predict, but the history of Europe - including the recent history of the Balkans - is full of bloodshed. A researcher had once estimated that if all outstanding land claims by nation-states in the Balkans were to be honored, the area of the peninsula would have to be two to three times larger than it is.

And while war is clearly not on the horizon right now, social upheaval, and perhaps increased tensions, probably are. A Greek debt default - something that, at least in the form of an "orderly restructuring", is practically unavoidable right now - would surely impact the whole region.

Greek banks, which will be hit particularly badly, as they hold a lot of their government's debt, also own a significant share of the region's financial system. That includes approximately 30% of Bulgarian banks, 17% of Romanian banks, 15% of Serbian banks, and a significant percentage of Macedonian and Albanian banks (more accurate data are hard to come by).

Sources and publications in the region (specifically in Bulgaria, which seems to be most exposed) report that Greek banks have already pulled large amounts of capital out of their regional subsidiaries and branches, and that this is causing a tangible financial crunch.

It is a different question that there are hardly any good choices when it comes to Greece. Some economists have long argued that it would be best (or least bad) for the country to leave the euro and to default on its debt. "The reason everyone assumes a default will happen is that the bailout program is not working," wrote Michael Schuman in an insightful analysis for Time Magazine last September. [7]

Part of the reason why Greece keeps missing targets and breaking promises is that the austerity measures already enacted, together with the political instability which has plagued the country, have caused an unprecedented drop in gross domestic product (GDP). According to an apocalyptic Reuters report, this could soon set a precedent in history. [8]

"It's an implosion - it's an endless sequence of implosions from bad to worse, to worse, to worse," a Greek economic expert told The New York Times last month. "There's nothing to stop the Greek economy losing 60 percent of its GDP, given the path it is at." [9]

On the ground, there are signs of panic as people reportedly stock up on precious metals, [10] and there is serious talk about "rolling blackouts". [11] In a poignant St Valentine's day article, Der Spiegel documents the plight of the "new poor" who were until recently a part of the Greek middle class. [12]

Previously, riots broke out in Athens and other cities on Sunday evening after the Greek parliament ratified a new set of austerity measures, with extensive arson and property damage. "Greek lawmakers approve austerity bill as Athens burns", a Reuters headline reads that day.

Now, even after one of the main Greek critics of the austerity measures, the leader of the conservative New Democracy Party Antonis Samaras, submitted written assurances that he will honor the bill, the northern Europeans have started to drag their feet. Increasingly, the subject of discussions has shifted to how well insulated Europe is from a Greek default.

Officially, the German government continues to deny that it considers a Greek default to be a viable option, but the unofficial talk about letting Athens go bankrupt, or alternatively delaying parts of the bailout package until after the elections, has grown louder. Brussels is clearly intent on holding the feet of Greek politicians to the fire, and that is a more dangerous undertaking than it seems.

1. Athens faces tough bail-out terms, Financial Times, February 16, 2012.
2. Beyond the edge, The Economist, (accessed) February 16 2012.
3. Far right on rise in Europe, says report , The Guardian, November 6, 2011.
4. Greek rhetoric turns into battle of wills, Financial Times, February 15, 2012.
5. Greeks direct cries of pain at Germany, Financial Times, February 14, 2012.
6. Germany's Role in Europe and the European Debt Crisis, Stratfor, January 31, 2012.
7. Six reasons why Greece should default, Time, September 23, 2011.
8. Analysis: Greece heads for record books as economy slumps, Reuters, February 15, 2012.
9. As Reforms Flag in Greece, Europe Aims to Limit Damage, The New York Times, January 15, 2012.
10. Spotlight on gold buyers, Ekathimerini, February 15, 2012.
11. Rolling blackouts a possibility , Ekathimerini, February 15, 2012.
12. 'New Poor' Grows from Greek Middle Class, Der Spiegel, February 14, 2012.

Victor Kotsev is a journalist and political analyst.

(Copyright 2012 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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