Thursday, December 11, 2008
Greek fighting: the Eurozone's weakest link starts to crack
Ambrose Evans-Pritchard at Dec 10, 2008 at 07:47:15 [General] The last time I visited Greece, I was caught in the middle of a tear-gas charge by police in Thessaloniki - a remarkably unpleasant experience, if you have not tried it. My eyes were in screaming pain for an hour. Protesters throw stones at police in the Greek city of Thessaloniki Protesters smashed up the shops on the main drag, broke the windows of my hotel, and torched a few cars. So the latest four-day episode in Athens and other Greek cities comes as no great surprise. The Greeks are a feisty people. This is meant as a compliment - broadly speaking - just in case any Greek readers should take it the wrong way. Hitler was so impressed by Greek bravery that he accorded Greek soldiers full military honours, almost the sole example among captive nations in the East - or at least professed to do so at first. That said, these riots are roughly what eurosceptics expected to see, at some point, at the periphery of the euro-zone as the slow-burn effects (excuse the pun) of Europe's monetary union begin to corrode the democratic legitimacy of governments. Note two stories in Kathimerini (English Edition) "Athens riots spin totally out of control" And an editorial: "Greece has gone up in flames and the concept of democracy and law and order has been eliminated" Without wanting to rehearse all the pros and cons of euro membership yet again, or debate whether EMU is a "optimal currency area", there is obviously a problem for countries like Greece that were let into EMU for political reasons before their economies had been reformed enough to cope with the rigours of euro life - over the long run. In the case of Greece, of course, Athens was found guilty by Eurostat of committing "statistical achemy" to get into the system - ie, they lied about their deficits. Be that as it may. Greece's euro membership has now led to a warped economy. The current account deficit is 15pc of GDP, the eurozone's highest by far. Indeed, the deficit ($53bn) is the sixth biggest in the world in absolute terms -- quite a feat for a country of 11m people. Year after year of high inflation has eroded the competitive base of the economy. This is an insidious and slow effect, and very hard to reverse. Tourists are slipping away to Turkey, or Croatia. It will take a long time to lure them back. The underlying rot was disguised by the global credit bubble, and by the Greek property boom. It is now being laid bare. Greece has a public debt of 93 per cent of GDP, well above the Maastricht limit. This did not matter in 2007 when bond spreads over German Bunds were around 26 basis points, meaning that investors were willing to treat all eurozone debt as more or less equivalent. It matters now. The credit default swaps on Greek sovereign debt were trading around 250 today (compared to 52 for Germany, 62 for the US, 120 for the UK, and 178 for Italy). It has moved into a class of its own. This is potentially dangerous because Greece needs to tap the capital markets for 40bn euros next year to roll over debt and fund the budget deficit, as well as 15bn euros or so in bond issuance by banks under the state's new guarantee. This is a lot of money. The Greek government will need budgetary discipline to convince markets that it has matters under control. But governments facing riots and imminent defenestration are not good bets for fiscal discipline. There is a general strike in any case on Thursday. While the violence was triggered by the death of a 15-year old boy, the underlying motives of the protest obviously run deeper. The hard left can mobilize demos because the youth unemployment is endemic and because the goverment is being forced by economic constraints to adopt a hair-shirt policy at a very bad moment. At some stage a major political party - perhaps PASOK - will start to reflect whether it can carry out its spending and economic revival plans under the constraints of a chronically over-valued currency (for Greek needs). Then there will be a problem. I am a little surpised that the riot phase of this long politico-economic drama known as EMU has kicked off so soon, and that it has done so first in Greece where the post-bubble hangover has barely begun. The crisis is much further advanced in Spain, which is a year or two ahead of Greece in the crisis cycle. My old job as Europe correspondent based in Brussels led me to spend a lot of time in cities that struck me as powder kegs - and indeed became powder kegs in the case of Rotterdam following the murder of Pim Fortyn, and Antwerp following the Muslim street riots (both of which I covered as a journalist). Lille, Strasbourg, Marseilles, Amsterdam, Brussels, all seemed inherently unstable, and I do not get the impression that the big cities of Spain and Italy are taking kindly to new immigrants. The picture is going to get very ugly as Europe slides deeper into recession next year. The IMF expects Spain's unemployment to reach 15pc. Immigrants are already being paid to leave the country. There will be riots in Spain too (there have been street skirmishes in Barcelona). Hedge funds, bond vigilantes, and FX traders will be watching closely. In the end, a currency union is no stronger than the political will of the constituent states. No doubt events will be ugly in Britain as well. My comments are not intended to suggest that British behaviour is better. Far from it. But I am certain that the British people still feel that the authorities who set economic policy are ultimately answerable to Parliament and to the democratic system. Will the Greeks, the Spanish, the French feel that way about the European Central Bank and the Stability Pact when the chips are really down?