With Greece rising back to the top of news headlines over the last two weeks some may wonder why so much time is being spent on Greece. If we were simply looking at it from an economic perspective, the conclusion would be that Greece is not worth paying attention to since it is a very small country and their economy makes up very little of the total European Union GDP. The reason for the intense focus on Greece is more of a geopolitical issue. Without going into a lengthy discussion on the structure of the European Union or the flaws of the European Union, what this boils down to is Germany (and the stronger European Union members) not wanting to set a precedent with Greece.
What is different with Greece this time compared to 2012 is that an anti-austerity political party was elected into power during the recent Greek elections and their platform was that they were going to renegotiate their debt and roll back many of the austerity measures that the previous administration had implemented as part of their borrowing arrangement with the Troika (International Monetary Fund, European Union, European Central Bank). So, this time, Greece is not asking to borrow more money. Rather, it is taking the position that the debt is too much and that austerity measures are making the situation even worse.
Germany is driving the process for the European Union and has taken a hard line towards Greece. Trying to read through the tea leaves, what seems to be the story is that anti-Euro political parties have been gaining power in many of the European countries and the European Union leaders do not want to set a precedent with Greece that could be a springboard for the other anti-Euro political parties. Spain has the Podemas party that shares the views of the new Greek government-Coalition of the Radical Left (better known as Syriza), Portugal has the Socialist Party, Italy has the left-wing members of the New Democratic Party, France has the Front National Party and Germany has the Alternative for Germany party. All of these political parties have been campaigning on anti-Euro, anti-austerity and national independence themes. The concern now is that if Greece gets the European finance ministers to agree to their terms, then all of these political parties will use that as a campaign theme where they promise to get the same deal for their country. This would create a domino effect that would probably spell the end of the Euro currency and the European Union. The stakes are far too high for Germany and the European finance ministers to allow that to happen. Thus, the hard line stance that has been taken.
Today’s news that Greece has agreed to request an extension of their current borrowing arrangement and submit a list of reforms that they will undertake appears to show that the European finance ministers strategy paid off (for now). The agreement is still pending Greece submitting an acceptable list of reforms on Monday (2/23/15) and the European finance ministers signing off on the reforms. The short-term deal has still left the risk of Greece exiting the European Union as a viable risk. Nothing of a more permanent nature has been agreed to and Greece’s problems have not been resolved.
For now, the European Union has won the first skirmish in the Greece saga. The agreement is only for four months of financial aid, so this story is far from over. The underlying issue remains that the European Union is a flawed model. You cannot have a unified Europe by simply having a unified currency. Unless the members of the European Union can ultimately form a unified government, the core issue of the European Union will not be resolved. The election of the Coalition of the Radical Left in Greece and the groundswell of anti-Euro political parties highlights this problem. If political parties come to power that want independence and national sovereignty, then the prospects for a unified European government becomes even more remote.
So, the reason that everyone is spending so much time watching Greece is that Greece is important to watch to see if it becomes the proverbial “canary in the coal mine” for the European Union.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.