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Opinion: Why the U.S. will have to bail out Greece
By Matthew Lynn
Published: Feb 18, 2015 4:00 a.m. ET
Athens and Brussels may want talks to fail, but Washington doesn’t
Reuters
Protesters take part in an anti-austerity pro-government demonstration in front of the Greek Parliament in Athens on Feb. 11.
Fighting has flared up again in the Ukraine. The Egyptians are sending soldiers into Libya as another North African state collapses into chaos. The militants of Islamic State are spreading their influence across the region. You’d think Barack Obama might have bigger foreign policy issues to worry about than a small state of 10 million people on the eastern edges of the Mediterranean.
But Greece may be about to turn from a European into an American problem.
As the game of brinkmanship between the radical Syriza government elected last month and the European Union gets played out, it has become increasingly clear that both sides may have a strong interest in the talks failing. The International Monetary Fund looks to have abdicated all responsibility for fixing the mess.
The worrying point is this: Both sides have an increasing interest in a catastrophic failure.
But the U.S., with the U.K. perhaps in a subsidiary role, has an equally strong interest in a stable Greece. If a crunch comes, America will have no choice but to bail Greece out. How? It may well need to extend emergency loans, prop up its banks, and if necessary help it establish a new currency as well.
On Monday, talks between Greece and the finance ministers of the eurozone ended chaotically. The Syriza government, led by the charismatic young Prime Minister Alexis Tsipras, is committed to ending the austerity regime imposed on Athens by the EU and the IMF and is refusing to borrow any more money under the terms of the bailout agreement.
The rest of the EU, led by Germany, is standing firm. It may be willing to make some minor concessions, such as rebranding the loans or extending their duration. But it does not look willing to compromise on the core issue — that Greece has to stick to the austerity plan, and keep tight controls on public spending.
There may still be a deal to be struck. Greece after all only accounts for a small percentage of the total eurozone economy. Its debts amount to just 315 billion euros, hardly a massive sum in the context of an economic bloc with a total gross domestic product of 9.5 trillion euros. But the worrying point is this: Both sides have an increasing interest in a catastrophic failure.
Look at it from the perspective of Germany, and the other core eurozone states. If they give in to Syriza, they will only encourage other radical anti-austerity parties in Spain, Italy and elsewhere. Any member state will be able to elect a left-wing government, ramp up public spending, and insist that the rest of the zone pay the bills.
The eurozone will have been turned from a merely dysfunctional monetary union into a completely unworkable one — and that is hardly an improvement. Worse, politicians who cave in to Syriza may well get wiped out when they next face the electorate. So they have to strong incentive to stay firm.
Then look at it from Tsipras’s viewpoint. If he compromises and starts tearing up his election promises, which include a higher minimum wage, and hiring more government workers, what then? The Greek economy will keep declining. And he will be out of power very quickly. If he sticks to his guns, Greece may well be ejected from the euro, but if Tsipras manages that well, he may well consolidate his grip on power.
Remember, Syriza is a party with its roots in hard-left Leninist politics. It isn’t necessarily afraid of disruptive change, and it won’t always play by the rules of the club of mainstream social democratic parties. So a Grexit may only be a possibility — Beremberg Bank, for example, currently puts it at 35% — but it could happen. If so, the U.S. would have to get involved. Here’s why.
The immediate aftermath of a sudden exit from the euro EURUSD, -0.17% would be chaotic. Greece would be bust, with little in the way of hard currency to pay for imports of oil and medicines. It would be under the control of a radical government, with little experience of power. Its medium-term prospects might be fine — but the short-term would be looking very bleak.
You might expect the EU to step in with financial and technical aid. It would if the Ukraine or Bulgaria were sliding into chaos. But Greece will be different. It will be important to the rest of the eurozone nations not only that Greece fails but that it is seen to fail and fail badly. After all, the worst thing that could happen would be for Greece to flourish outside the single currency — which, with a massively depreciated currency, and lots of financial aid, is what could happen pretty quickly. So the rest of Europe may sit on its hand, even if it collapses.
You might also expect the IMF to step in. Rescuing states that have failed financially is, after all, its job. That is what it has done in Argentina and Thailand and many other countries. And yet, under its French managing director Christine Lagarde, the Fund has proved to be more interested in supporting whatever the EU wants than preserving global financial stability. If the EU wants Greece to fail, the IMF may go along with that.
Who does that leave? Greece can turn to Russia for help, and the new government has already struck up a friendly relationship with President Vladimir Putin. The Chinese may want to increase their influence in the region. But it mainly leaves the U.S. Only one country has the financial resources and the technical expertise to help a country collapsing financially — and that is America.
The U.S. doesn’t want Greece to turn into a failed state — there are already too many of those on the other side of the Mediterranean. Nor does it care one way or the other whether the euro succeeds as a currency or not. Indeed, as a long-term rival to the dollar, it would probably prefer if it didn’t.
The chances are that no one in Tennessee or Idaho really wants to bail out the Greeks. But if this mess doesn’t get fixed soon, come the summer that might well be what happens.
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