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Analysis
Multilateral fissures in Brussels

Multilateral fissures in Brussels

Worst-case outcomes still possible after marathon talks 

by David Marsh

Mon 13 Jul 2015

The fissures exposed between, and within, the warring groups of euro area debtors and creditors are the widest and deepest in the last 5½ years of turbulence over the single currency. The gloomy predictions of the late German-British sociologist Ralf Dahrendorf, who said before it started in 1999 that economic and monetary union would split rather than unite Europe, have become reality.

Angela Merkel, the German chancellor, has found herself under simultaneous attack over Greece from Germany’s traditional allies the US and France – pleading for a more lenient line on Athens – as well as from hostile elements in her own conservative parties calling for the opposite.

The intractability of the marathon talks painfully exposes the impossibility of a deal that would satisfy both creditors and debtors. The euro members have had to choose between several sets of massively unpleasant results.

Several ‘worst-case’ outcomes are still possible, including the fall of the government of Alexis Tsipras and the calling of new elections in Athens; introduction of a parallel Greek currency (backed by the remaining reserves of the heavily-borrowed Bank of Greece, which are quite considerable if loans are not paid back); and Greek departure from (or suspension within) the euro.

Another result, if things go badly, would be the break-up of other European governments (including the German one). And that is not to mention the various unsettling geopolitical consequences of a Greek euro departure, including an intensified ‘arc of crisis’ linking Ukraine to the Balkans to the storm-tossed countries of Syria and Iraq.

The multilateral rifts within the ranks of the creditors have been laid bare by French and Italian insistence (backed by Spain and Luxembourg) that Greece should be rescued. There are three reasons behind this: to salvage a semblance of European unity from the shambles of the past few weeks; to force a climbdown from German insistence on ‘austerity über alles’; and to ward off the danger that EMU, in losing Greece, would become more exposed to financial assault on vulnerable and much larger members.

Yanis Varoufakis, the firebrand former Greek finance minister, who resigned a week ago, has made way in the ministerial chamber for his quieter former colleague Euclid Tsakalotos. But he has been stoking the flames from the sidelines with weekend allegations that Germany has wished to bring Greece to heel to discipline France.

Varoufakis’ claims, underlining that Greece is both a pawn and a buffer in a long-running monetary warfare between Germany and France, do not tell the whole story, but are based partly on first-hand experience and have clear plausibility. The ultimate fault line in the EMU edifice runs between Paris and Berlin.

The accord unveiled this morning in Brussels imposes harsh terms on Greece, turning the country practically into a vassal of the European Union, unwinding most of the election promises of the Syriza government that came to power in January and signalling its ritual humiliation. Whether or not the terms are politically acceptable to a restive Greek parliament and whether they can be implemented are important but perhaps not the most relevant questions. Even if the Athens parliament does approve higher taxes, ‘ambitious’ reforms to pensions and labour markets, a return of the troika and much more vigorous privatisation including quasi-sequestration of state assets, it is unlikely that the package will generate the growth and debt sustainability that Greece and its creditors badly need. The Greek prime minister failed to get the early pledge of debt relief that Athens insiders believed was the minimum to gain parliamentary acquiescence.

The convoluted, confused negotiations between Greece and its partners reflect the reality that different groups have been talking at cross purposes for the past month. The amount of money at stake, the length of time of any further Greek subjugation to its creditors and the degree of political sovereignty being jettisoned or fused have all greatly increased in the last few weeks.

The Greek electorate in the 5 July referendum said No to a set of creditors’ terms for a relatively small extension of bail-out money (€7.2bn) due to have been disbursed by the end of June. The volume now being requested is 12 times bigger – €82bn to €86bn including money for recapitalising Greek banks hard hit by dislocation. So the creditors’ conditions are far more onerous – and are far less likely to be met in any satisfactory way.

We have been here before. The developments of the last few days are reminiscent of the great monetary skirmishes of November 1968, the first act in 30 years of currency attrition centred on the D-mark and French franc that ended in 1999 with the subsuming of both currencies into EMU. Despite furious pressure from the French, Americans and British, the Germans refused to revalue the D-mark. Instead Bonn decided on a package of border taxes to make imports cheaper and exports more expensive, claiming that this was a more flexible method of countering currency inflows. The Brussels debacle has however been on a far grander scale and the fractures unveiled more powerful. 

One of the drawbacks for non-EMU countries like the UK, it was said in 1998-99, was that they would not be allowed to take part in important meetings on the future of Europe where participation would be limited to euro members only. After weeks of unedifying summit gatherings in Brussels, the reluctance to sign up for the euro by non-members – relatively untroubled countries such as Sweden, Denmark, Poland and the Czech Republic, as well as the UK – can only have increased. The abiding impression of the past few weeks’ squabbles is that EMU has developed into a permanent source of divisiveness.

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