Andy Langenkamp is a global policy analyst for ECR Research.
We at ECR Research didn't think a Grexit was on the cards even before the recent deal struck between Greece and its eurozone partners, and we are now even more confident about this assessment. However, we do see troubles on the road ahead:
• Creditors are probably hoping that growth in Europe will pick up enough in the coming years to allow them to write off Greek debt without the public taking much notice. However, if European growth continues to underperform for a length of time, the moment may arrive when Europe and Athens can no longer pretend that Greece is solvent without having the political and economic cover to implement a huge haircut.
• Most experts doubt the sustainability of the current Greek coalition - the two parties are far apart on the left-right political continuum. A government collapse would usher in a new period of political and economic instability that may be too much for the Greek economy to handle, resulting in the much-feared Grexit.
• Strong performances by populists in coming national elections around Europe could complicate politics in Brussels and undermine future deals on eurozone integration. European politicians often have little political room for maneuver in negotiations as a result of the growing populist, nationalist electoral threat.
• Europeans have increasingly discovered that globalization, aside from being a force for prosperity and progress, can also cause political and economic havoc. Greece has experienced firsthand the ways globalization undermines democracy. It's an illusion to think that economic policy can be decided on a national level. But the more voters experience this - the more they harbor the idea that outside forces are hurting them, and their respective governments can do nothing about it - the more anti-establishment, anti-EU parties will thrive. Their nationalism and focus on sovereignty will impede Continental cooperation right at the time when economic risks and geopolitical dangers make it essential.
• What's more, in France, President Francois Hollande and his government are trying to circumvent democracy in order to push through economic reforms. This will probably please markets. However, spurned voters could strike back against mainstream politics, in this case by supporting Front National. It doesn't help that Hollande and opposition leader Nicolas Sarkozy are both very unpopular.
• Inside and at the edges of the European Union, we are witnessing the maturation of authoritarian tendencies in Hungary, Ukraine, Turkey, and Russia, to name a few. This illiberal trend can only be countered by a united front, and that unity is nowhere to be found right now.
Dutch journalist Caroline de Gruyter recently wrote that the Greeks have been the first to discover that globalization and democracy make uneasy partners. They won't be the last nation to discover this, and this will cause big troubles in the years ahead.
For now, we expect the eurozone to stay afloat, and we would not be surprised if the euro strengthens as the Greek crisis is put to rest for the coming weeks and months. But the coming talks will surely be difficult. As the Financial Times wrote: "It is a sign of low expectations in the handling of the Greek debt crisis when a deal to keep the country from chaos for four months at the most and only 72 hours at the least is hailed as a great breakthrough."
The events of recent weeks have done absolutely nothing to improve the personal ties between the Greek government and its European counterparts. Grandstanding, mutual accusations of bad faith, and needlessly confrontational politics have eroded much political goodwill. This is likely to make the coming talks even thornier than those that recently concluded.
In the end, a choice will be made between the amputated leg theory (the view that cutting off the gangrenous Greek limb will save the body of the euro) or the domino theory (the idea that a Grexit would cause other vulnerable economies to follow, destroying the monetary union). We subscribe to the latter, but some of our financial analysts are starting to doubt this. We all do agree with the analysis of Eurasia Group that "the politics of Europe" is the number one global risk this year, and it will remain so if Europe keeps playing these political and economic games.
(AP photo)
