Since the eurozone crisis started more than two years ago, skeptics
have been quick to dismiss the simmering problem as much ado about
nothing.
Shoot, they're just a bunch of socialists getting their
comeuppance, right? And the Greek economy is insignificantly small, at
around $300 billion. That's worth just 2% of the U.S. gross domestic
product.
While the financial markets have been jumpy over the
issue since it started, the slow, drip-drip deterioration of the
situation across the Atlantic has started to bite in very real ways. The
unemployment rate is rising again here at home, factory activity has
stalled around the world, and much of Europe has fallen into a new
recession.
According to Bank of America Merrill Lynch economist
Ethan Harris, there are "growing signs of a synchronized global
slowdown." From China to India, Hong Kong and Australia, GDP forecasts
are being slashed as global trade slows. Harris sees "a significant risk
of a global recession" later this year or in early 2013.
As a
result, something that once seemed innocuous and maybe a little funny
has assumed a deadly seriousness. There's a key date to mark on your
calendar: June 17. That's the date of the next parliamentary election in
Greece. And without substantial action between now and then, the
situation gets much worse for everyone.
Europe divided
In the context of all of this, the political
fabric that binds the eurozone together is fraying badly, as countries
and institutions group themselves into two corners.
Troubled
nations including Spain and Greece -- supported by Italy, France and the
European Commission -- want more leniency and help as they try to
rebalance their economies, address structural inefficiencies, pay down
debt, close budget deficits, recapitalize banks and return to growth --
all at the same time.
This pro-growth bloc is pushing hard for
things like a eurozone bank deposit insurance program (ending bank runs
via a eurozone version of the FDIC, the deposit insurance program in the
U.S.) using eurozone bailout funds to recapitalize weak banks (instead
of making Spain's government help its banks, which would take pressure
off of its budget deficit); and the issuance of "eurobond" debt backed
by the entire eurozone (to push down borrowing costs for troubled
nations). They also want the European Central Bank to step up its
stimulus efforts.
The pro-austerity bloc, including Germany and
the Netherlands, wants progress on things like economic reforms,
constitutional commitments to balanced budgets and state asset sales
before any of this happens. The worry is that cheap money, in the form
of ECB loans to the financial system, could unleash dangerously high
inflation.
Salvos
are being exchanged, and positions are hardening. The ECB is caught
somewhere in the middle, with its executive board dominated by
pro-growth nationals while the German Bundesbank still wields enormous
influence.
You can see who is ahead in this debate in the results
of the recent French presidential election, which replaced pro-austerity
Nicolas Sarkozy with pro-growth François Hollande. This has changed the
balance of power and has emboldened the pro-growth faction.
What we have now is an epic game of chicken spiced with daily doses of rumor and conjecture about who will win.
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