Greece’s economic and political unraveling could not be coming at a worse moment for President Obama. The crisis has the potential to send shock waves not simply through Europe but also through global financial markets on the very eve of the U.S. presidential election. Those shock waves could stop in its tracks the modest healing in the U.S. labor market that President Obama is hailing as one of his administration’s major achievements.
By now, there can be little doubt that Greece is headed for a disorderly default and an ignominious euro exit. The Greek parliamentary elections on May 6 could not have made clearer the Greek population’s unwillingness to persevere with the I.M.F.-E.U.’s hair-shirt fiscal policies that have already brought the Greek economy to its present sorry state. Almost 70 percent of Greeks voted against austerity in that election. And the I.M.F. and E.U. could not have made it clearer to Greece that without more fiscal austerity, they will cut Greece off from further official financing. Absent further loan disbursements from the I.M.F. and E.U., Greece will have little option but to default on its official loans. It will probably also be forced to exit the euro.
The political groundswell in Greece against further I.M.F.-E.U. imposed austerity is all too easy to understand. Over the past two years, the Greek economy has literally collapsed as a result of the application of I.M.F.-E.U. austerity within a euro straitjacket. That straitjacket has prevented Greece from using exchange rate policy as a means to offset the negative effects of fiscal austerity on domestic output.
Since its peak in 2009, the Greek economy has contracted by a staggering 16 percent. Meanwhile unemployment has risen from 7 percent to almost 22 percent, while youth unemployment now exceeds 50 percent. Little wonder, then, that the Greeks are bridling against I.M.F.-E.U. demands for further public spending cuts totaling a staggering 5½ percent of GDP in 2013 and 2014 that all too likely will only drive Greece further into economic depression.
Over the past few days, the Greek president has repeatedly tried to form a new government. Those attempts have failed. In mid-June, the Greeks will head back to the polls for a second parliamentary election. Recent electoral polls suggest that were Greece to have another election today, the far-left Syriza Party, which is vehemently opposed to continued I.M.F.-E.U. austerity, would become Greece’s dominant party. This has to heighten the chances that by late summer at the very latest Greece will have defaulted on its official borrowing and will have exited the euro.
It cannot be lost on European policymakers that a Greek default would be occurring at a very difficult juncture for Europe. Across Europe there are the clearest of signs that German-imposed fiscal austerity is not working and that the whole of the European periphery is sinking ever deeper into economic recession. This in turn is fanning political forces that are weakening Europe’s political center and undermining the electorate’s resolve to stick with austerity policies.
What has to be keeping European policymakers awake at night is the fear that a Greek exit from the euro will cause contagion to the rest of the European periphery. Seeing the economic and financial chaos in Greece, bank depositors in Ireland, Italy, Portugal and Spain could very well start running on their banks and move their deposits to safer havens like Germany or Switzerland. What makes this all too likely is the poor state of the peripheral economies and their own domestic political malaise.
The last thing that President Obama needs right now is a full-blown European financial crisis that unsettles global financial markets. Such a scenario is almost certain to raise serious questions as to whether the disarray in the U.S. public finances might not be leading the U.S. down the European path to ruin. Yet, with the way that Greece now seems to be rapidly hurtling toward political un-governability and economic chaos, President Obama might soon have to resign himself to such a scenario.
Desmond Lachman is a resident fellow at the American Enterprise Institute.