Contagion threat to Irish banks if Greeks exit euro

Thu, May 17, 2012, 01:00

ANALYSIS: EUROPE AND the world can but look on in trepidation as the Greeks prepare for their second general election in two months. At stake primarily is the country’s membership of the euro. It follows that the outcome will have profound implications for the wider European project.

These are tense, fateful times. The sense grows that the debt emergency, which has seen many dark and fearful days, has never really been this bad. For all the bickering over the political response to the crisis, it was always a core policy that the single currency would be kept intact. The grinding force of events within and outside Greece means that can no longer be a given.

Europe’s patience with the country has practically disappeared. Any Greek exit would present abundant, possibly uncontrollable danger for Ireland, star pupil in the bailout class but still encumbered by a gigantic banking debt. As financial markets reassess risk in light of any Greek departure, the weakest countries would come under the threat of speculative attack and seizure in their banking systems.

By the time Greeks go to the polls on June 17th, the Irish will have voted on the fiscal treaty. Rejection would radically amplify Ireland’s frailty if disaster strikes Greece. Not even a resounding Yes vote would ensure safety. Contagion tends to be indiscriminate.

After all, a Greek departure would send the signal that monetary union is not irreversible. It would also go against the integrationist grain which is at the heart of the EU’s mission. A value system which has as a core tenet that the strong help the weak would be threatened. While there is plenty of talk in Brussels about solidarity being a two-way street, Greeks argue that the price of solidarity is far too severe for them.

An exit could sunder the effort to develop a new growth strategy for Europe. A fundamental loosening of the austerity wrench seems unlikely – euro zone finance ministers reaffirmed the policy as recently as Monday night.

Still, moves are in train to improve the conditions for growth. The firepower of the European Investment Bank may be boosted, potentially releasing tens of billions of euro into moribund member states. Unutilised structural funds may yet be set aside for new growth projects. Such initiatives are dear to the new French president François Hollande and, it must be said, many other leaders.

The sense remains that Hollande will succeed in achieving some kind of a change to the treaty to strengthen its commitment to growth, but nothing to unwind the fiscal discipline elements. For German chancellor Angela Merkel, that may well be the price of Nicolas Sarkozy’s defeat. Hollande wants her to accept jointly issued eurobonds, but this seems unlikely.

At the same time, German central bankers appear increasingly willing to accept a higher inflation rate in the greater European interest. The basic idea is that a generous wage round would draw in exports from Germany’s hinterland, thereby boosting growth. In the land of fiscal rectitude, that would be quite a departure.

The problem remains that the Greek situation could upset everything. Right now it is simply not possible to foresee what will happen in Athens, nor to predict with conviction that Europe would be able to contain the fallout if the Greeks are cut loose.

With Spain in deep trouble and Italy under threat, EU leaders are scarcely containing the crisis as it stands. At several junctures on the hard road to this sorry place, political action or inaction made things appreciably worse.

The argument goes that the EFSF-ESM “firewall” is big enough, strong enough, flexible enough. But no one really wants to test the theory. To do so is to run the risk of repeating the Lehman shock – and possibly worse.

At one level, increasingly shrill warnings to the Greeks from Berlin, Frankfurt, Vienna, The Hague, Helsinki and Stockholm are designed to jolt the doubters into submission to the bailout. At another, however, there is the matter of what the Greeks themselves want.

The first election 11 days ago was widely cast as referendum on the EU-IMF bailout. A majority voted for rejectionists of one hue or another, leading to the present paralysis. With the new poll already billed by Germany as a referendum on euro membership, the main question now is whether the naysayers advance still further or retreat.

EU leaders have hinted at minor amendments to the bailout programme but no revision at the root level. Although many Greeks feel their side of the bargain is too onerous by half, Europe insists there is no alternative. While there is vague talk about a new European growth plan for Greece, a steady outflow of deposits from its banks points to apprehension and anxiety. Greece is in its fifth year of recession. A fundamental lack of confidence prevails.

Post-election opinion polls have already registered growing support for the nascent Syriza movement, the uncompromising leftist group which came second last Sunday week. This has fanned expectation that it might come first next time. Syriza’s emboldened leader Alexis Tsipras insists he wants Greece to stay in the euro but he rejects outright the austerity strings attached.

Greece’s international sponsors insist these two positions are irreconcilable. In their eyes, Tsipras is immorally peddling alchemy. Bailout aid would be withdrawn if he won the election, took charge of a government and refused to back down. If that happens, Athens would be on its way back to the drachma.

The official position in Europe is that Greek democratic prerogatives must be respected no matter how the cards fall. Still, there is no concealing the ardent hope that voters come to their senses if and when they realise the gravity of the choice they face. Some official observers in Brussels cite the example of the second Irish votes on the Nice and Lisbon treaties. Others point to opinion polls which show a majority of Greek still want to stay in the euro.

Whether that is enough to penetrate Tsipras’s measured charisma can only be guessed at. It is fair to say, however, that optimism is in rather short supply.

In the first election, Syriza came behind the centre-right New Democracy and ahead of the Pasok socialist movement The latter two dominated Greek politics since the military junta was toppled in 1974. Entrenched corruption in the supersized state they ran into the ground lies behind a precipitous collapse in their support. The chiefs of the old order now find it exceptionally difficult to make the case to their countrymen for an ever more demanding bailout programme.

This is the state of play. If Greeks vote a second time against the bailout parties, it would be increasingly difficult to sustain the country in the euro. The trouble would be only beginning.

Arthur Beesley is European Correspondent

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