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Business News/ Opinion / Political implications of the Greek crisis
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Political implications of the Greek crisis

A political backlash could grow stronger in case the debt crisis deepens

Illustration: Jayachandran/MintPremium
Illustration: Jayachandran/Mint

The Greeks have voted resoundingly against the economic policies that its creditors in the European Union want it to pursue. A strategic default on its debt could perhaps help improve the prospects of the Greek economy in the long run. However, there is no doubt that there will be immediate costs to be borne: yields on Greek debt will rise, banks could collapse, goods will vanish from the market as panicky citizens begin to hoard, inflation will shoot up in case Greece moves back to its own currency.

Meanwhile, other weak European countries such as Spain could be tempted to follow the Greek strategy. The impact of a Spanish or Italian default will be far more severe because of the size of their outstanding public debt. The European lenders thus have good reason to worry about the catastrophic impact of moral hazard in case they agree to write off Greek debt.

There is one principal economic lesson from the Greek crisis: a monetary union cannot work well unless there is a fiscal union as well. In other words, what is needed is a closer political integration of Europe as nation states give up their fiscal rights. The European countries had tried a compromise to deal with the problem in 1997 by agreeing to limit their levels of fiscal deficit and public debt, so that underlying economic conditions are broadly similar. The Greeks essentially cheated on this agreement to coordinate fiscal policy by cooking the books, a ploy that helped them borrow at German rates despite weaker economic fundamentals.

The economic risks from a Greek default are pretty widely recognized. There is less discussion about the political risks involved. That is unfortunate.

The Greek vote should be seen against the backdrop of the wider advance of Eurosceptic parties in the May elections to the European parliament. The leftist Syriza in Greece and Podemos in Spain find themselves in the company of such rightist parties as the National Front in France, the UK Independence Party and Jobbik in Hungary.

The grand European project has its origins in the years after the end of World War II. Visionaries such as Jean Monnet convinced the political leadership of the day—especially Konrad Adenauer of Germany and Robert Schuman of France—that deeper economic engagement between European countries would be the best way to prevent a repeat of the mistakes that led to so much bloodshed in Europe between 1914 and 1944.

The first step towards European integration was the setting up of a common system for coal and steel in 1951; then the European Economic Community was set up in 1957; the European Currency Unit was put into action in 1979 as part of the European Monetary System; the Maastricht Treaty in 1992 led to the creation of the European Union; the euro made its debut in 1999; and there was a gradual expansion in the number of countries who became members of the European system.

The journey from an agreement to coordinate the market for coal and steel to a customs union that freed up trade across European borders to a common currency has been a long one. The next logical step would have been a closer political union. What has happened in Greece is perhaps the biggest challenge to the ambitious project to unify Europe without guns.

The results of the latest European elections suggest that a political backlash could grow stronger in case the debt crisis deepens: citizens in creditor nations will protest against bailouts while citizens of debtor nations will be unhappy with enforced austerity.

The past few months have opened important fissures in Europe. It was not too long ago, in December 2013, when protesters in Ukraine waved the European Union flag as a metaphor for democracy. The Greek crisis has overturned matters. The European Union is now accused of behaving in an autocratic manner. This quick change in perceptions is worth mulling over.

Can European countries remain in a union? Tell us at views@livemint.com

Follow Mint Opinion on Twitter at https://twitter.com/Mint_Opinion-

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Published: 06 Jul 2015, 05:43 PM IST
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