Would Greek EU Exit Create a Global Domino Effect?

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The European Union, seeming unforgiving Monday to a starving Greece, could see an unraveling resulting from a possible Athens defection followed by Spain, Italy, Portugal and Ireland. And Russia, blistered by EU economic sanctions over the Ukraine conflict, appears to be waiting in the wings to help the process. This could, in turn, involve China. Meanwhile, a major report warns of international debt leading to global economic problems. Fasten your seat belts.

Monday’s negotiations between European Union finance ministers and Greece’s new government proved brief and broke off, not a good sign for the EU’s future, even though Greece has indicated it wants to stay in the EU. Here’s why:

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Greece Election
Young Greek celebrates Syriza Party’s victory.

The EU is demanding that the new Greek government stick to a debt-payback plan agreed to by the former Greek government. The new Athens regime argues that the old plan includes austerity which is literally killing Greek citizens and has placed the country’s economy in a no-growth position. Greece’s left-wing Syriza Party was propelled into office by an angry electorate because it promised to scrap austerity and get a new financing plan from Brussels. Seeing no cooperation from the EU ministers basically led to Greece’s quick exit Monday from the talks.

The EU on the other hand must see itself in a pressing crevice. If it provides any breaks for Greece on its old agreement, the other suffering EU nations will also seek new arrangements on their debt agreements. That could cost money for the banker Troika — the EU, the International Monetary Fund, and the EU Central Bank  — which is funding the old debt pacts.

If the EU and Greece cannot reach a meeting of fiscal minds, it could lead to Greece’s defaulting and being forced from the EU, or leaving on its own. Once such a separation occurs, it could cause other exit efforts from the four other struggling countries.

The Greek Seeks Reforms

Up to today, Greece’s Finance Minister Yanis Varoufakis has not minced words on what Greece refuses to accept, and what it wishes to occur. In a New York Times op-ed on Monday, Varoufakis made clear his government’s mandate from the people:

We shall desist, whatever the consequences, from deals that are wrong for Greece and wrong for Europe. The “extend and pretend” game that began after Greece’s public debt became unserviceable in 2010 will end. No more loans — not until we have a credible plan for growing the economy in order to repay those loans, help the middle class get back on its feet and address the hideous humanitarian crisis. No more “reform” programs that target poor pensioners and family-owned pharmacies while leaving large-scale corruption untouched.

But he also made clear that Greece wanted to reasonably work with its “European partners” and not default on its payments or leave the EU:

Our government is not asking our partners for a way out of repaying our debts. We are asking for a few months of financial stability that will allow us to embark upon the task of reforms that the broad Greek population can own and support, so we can bring back growth and end our inability to pay our dues.

The EU ministers today appeared, however, to demand the current repayment structure continue, which Varoufakis found unacceptable.

The Struggling Countries

Last Thursday, The Economist magazine’s Intelligence Unit issued an 18-page report entitled “Where next for the euro zone?” The article looked at the EU’s “most fragile member states: Greece, Spain, France, Germany, Italy, and Ireland.”

Greece

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On Jan. 25, The Economist had predicted the risk of Greece’s leaving the euro zone at 30%. By last Thursday, it had increased that to 40%. Odds are that number will have jumped more after Monday’s break-off in negotiations.

Spain

Spain saw its “first full year of employment growth since 2007. The unemployment rate averaged 24.4% for the year…The notorious duality of Spain’s labour market is being slowly eroded, with temporary workers accounting for 24.2% of salaried employment in 2014, well below the rates of over 30% that were prevalent in the boom years.”

However, the report didn’t speak of a quarter of the workforce being without jobs as a suffering reality which, along with austerity measures, have led to massive public protests.

France

“The latest sentiment indices from the European Commission underline the current gloom pervading French households and businesses…reflecting the weak trend across all sectors of the economy.” the report noted.

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The report stressed that France’s “slump in the construction sector continued apace (housebuilding has declined steadily in recent years). Perhaps most worrying was a third consecutive monthly fall in services confidence on the back of declining demand and employment expectations.”

GDP barely expanded in real terms in 2014, the report noted, adding, “Our forecast for real GDP growth of 0.9% in 2015 is likely to stay unchanged.”

Italy

The Economist opted to avoid Italy’s economy, concentrating on a rift between the country’s two main parties:

The main centre-right party in opposition, Forza Italia (FI) led by Silvio Berlusconi, declared on February 4th that it considers the political reform pact with Matteo Renzi, the prime minister and leader of the dominant centre-left Partito Democratico (PD), to be “no longer binding”… FI’s decision risks derailing plans to introduce the most significant political and institutional reforms of the last 25 years.

The rift, however, seems to have resulted from the struggling economy. As Bloomberg reported on Feb. 13: “Italy’s economy stagnated in the three months through December, failing to rebound from its longest recession on record.”

Ireland

The report concentrated on Ireland lowering its deficit, considering it a positive sign that will continue. However, the Irish Times on Monday questioned the government’s claim it was ending austerity:

The Minister for Finance concluded his Budget speech with the words “a new road for a new Ireland”, and brought to an end a string of seven austerity budgets. But the centrepiece of his Budget is a €585 million tax package funded out of unspecified tax growth and expenditure restraint. It sounds very like the old road.

The Irish Times indicated the budget provided gains for all top-rate taxpayers, but not for the poorest households.

Germany

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As opposed to the suffering EU members, Germany continues to prosper, according to the report. It cited a record-high trade surplus in 2014 of 218.7 billion euros, leading to a GDP of 7.6%.

The Russian Connection

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Greek P.M. Alexis Tsipras and Vladimir Putin

It’s hard to see Germany’s economic success sitting well with Greece et al, seeing as the Germans are heavily involved in bailing out the poorer nations, and keeping a hard line in wanting them to follow the austerity plan set up by the Troika.

Germany’s Prime Minister Angela Merkel fueled that discontent a couple of weeks ago, claiming Greece could exit the EU, probably leaving the union better off. That brought Moscow’s calculated response.

Russia almost immediately said that, if Greece left the EU, Moscow would help it financially. Russia’s steaming over EU’s economic sanctions, which are hurting the Russian economy. So it jumped on Merkel’s sarcasm. This mess could quickly also include China, who has publicly said it will financially support Russia through its fiscal struggles.

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Do you see where this could go? If Russia could find a way to get back at the EU by helping it unravel, it could put the developing nations of BRICS (Brazil, Russia, India, China and South Africa’s economic organization) in a stronger global position. The U.S. has been attempting to destabilize BRICS, pushing to harm Russia through its and the EU’s sanctions, disrupt China’s growing economic power, and develop closer ties with India.

At the basis is BRICS’s effort to destabilize the currently strong U.S. dollar, which we’ve discussed in columns here and here. It has led to a growing global currency war, which we’ll continue to watch.

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Earth Crack?

Meanwhile, the whole Earth economy is showing signs of breakdown, according to McKinsey & Company, the global management consulting firm. Its McKinsey Global Institute issued a report this month warning that international debt is worse than at the time of the 2007-8 meltdown:

Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points. That poses new risks to financial stability and may undermine global economic growth.

 

Since the Great Recession, global debt has increased by $57 trillion, outpacing world GDP growth.

The report noted that government debt is unsustainably high in a number of countries, household debt is reaching new peaks, and China’s debt — while still manageable — has quadrupled since 2007. You can read the report here.