Monday, 11 July 2011

The Greek crisis and how it will change the world

We remember 2001 for the terrorist attacks of 9/11. The rest of the decade was hugely influenced by debates and actions related to the terrorist attacks. Presidential campaigns were fought over how to deal with the repercussions, the idea of security started to bite off civil liberties, governments tumbled around the world (at gun point or at the ballot box). But as the author of the attacks was erased from the list of the most wanted people on the planet and the dust began to settle on the rubles created by 9/11, the world wakes up to a different crisis. One that started in 2001 as well but was initially seen as unimportant. On the first of January 2001, Greece joined the euro zone. Greece so became the 12th member of the currency area, giving up the drachma after dramatically cutting inflation and interest rates. Fast forward to 2011 and the Greek debt crisis is threatening the very existence of the European Union, the most successful liberal experiment in world history. With the EU, the world economy might be tore apart.

Greece no longer seems to be a sovereign country as the EU and the IMF essentially control the its finances and with it the entire economy. It is not just the people that have lost control but it is the Parliament as well. While the recent measures might have been adopted by the Parliament, we shouldn't fool ourselves by thinking that this was done in an independent way and not at the pressure of the EU and the IMF (expressed in the most public and direct way possible). As the problems in Greece are here to stay, it is not a matter of time until Greece will reclaim its sovereignty. The situation might be permanent and might prove to be a model for further integration not just in the EU but in the entire world. Though this experiment is just starting in Greece (the place that started other political concepts that ended up changing the world) it can spread fast to other countries as well (starting with the periphery of the EU, continuing with the EU and then spreading around the world).

If it does not default, Greece will eventually pay its debt through the crisis- management mechanism to be established in 2013. So the actual payer of all the debt will be the EU as a whole not just Greece. In return for this favor, Greece gives up its economic sovereignty. As this situation will probably extend in one form or another to other countries (already happening to a lesser extent in Portugal), other EU countries will see their economies becoming even more interdependent through loans, with a European Central bank increasingly influential and a system that allows the Commission to exert even more power over national budgets to prevent further crisis, the Europeans will slowly start to get used to supranational institutions playing an important role in their economy and society. It will be the next step in European integration with another dose of internationalism added as the IMF will be involved as well.

There is, however, another possibility. The population might not be ready for this step yet. The Greeks might not accept the austerity proposed by foreign powers and Northerners might not want to accept to pay the bill for governments that didn't know how to manage their money. Not just on the long term term, the danger is that nationalistic forces might tear apart the EU. This is an extreme scenario as resentment could rapidly get out of control, with the masses accusing one country or another for their economic difficulties. If a political and institutional disintegration of the EU would be coupled with another economic meltdown, we would have the perfect ingredients for a violent situation.

The two scenarios might seem just the extremes of a range of other possibilities but as the crisis continues, the possibilities in between them quickly become improbable. With Greek debt ballooning increasingly faster (it is expected to grow by another 25% of the GDP this year alone) it becomes clear that the country will not be able to pay its debts. So it will either give in to the protesters by defaulting and leaving the euro, which will rocket the markets and probably start a default domino that would engulf all Southern Europe, wreaking the world economy at the same time; or it gives up its sovereignty and sets up a precedent. The EU will have to further integrate its market and the budgets will no longer be decided in national capitals but in Brussels, either by the Commission or by the Council (we can argue that they already are decided in the Council). This might be hard to sell to the national audience but a refusal from a nationalistic party that takes power in an EU country would have roughly the same consequences as a Greek default (which it will probably cause anyway).

The current crisis is a proof of how interconnected the EU economies already are. If a country that represents only about 2% of the eurozone economy could bring down the currency and Union, it means that the system components are extremely interdependent. Or that the system itself is badly managed. Unfortunately, both are true in the case of the EU. If economic integration becomes the chosen solution, the management of the EU must be reformed as well. The immense bureaucracy must become a thing of the past, decisions would have to be taken fast and regulations would have to be less hard to implement.

Whatever happens, it will probably have great implications for the rest of the world. The world economy will not easily cope with an EU fragmentation (let alone any kind of violence in Europe). But if the integration process will prove to be a success, it will become a model for other regions as well and it will encourage the economic groups already existing to accelerate integration.

The moment that many politicians have tried to avoid throughout the history of the EU appears to have come. A single European economy over which national governments have only a minimal influence could mean the death of the idea of sovereignty in Europe. And if Europe countries accept this (and it proves a success), why would the rest of the world act any differently? That Greece is the place where all this is happening only seems to be appropriate.

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