Europe’s Responsibility Trap

The world got the Greek election outcome it wanted. So why are the markets freaking out?

Antonis Samaras, leader of the New Democracy party
Antonis Samaras, leader of the New Democracy party

Photograph by Oli Scarff/Getty Images.

Over the weekend, the world was supposed to be terrified that Syriza—the Greek self-proclaimed “radical left” party that’s been surging as the old order is discredited in the face of economic collapse—would win an election. Syriza, you see, planned to refuse to implement austerity measures already agreed to by the Greek government and the “troika” of the IMF, the European Commission, and the European Central Bank. This dangerous game of chicken would lead either to Germany caving and offering more generous terms or Greece getting kicked out of the eurozone. But the voices of the conventional wisdom got their way and the center-right New Democracy party eked out a narrow win that should let it form a coalition with the center-left Pasok and go on implementing a policy agenda cooked up in Berlin and Frankfurt.

Markets were supposed to be reassured. Instead they’re freaking out. European stock markets are declining, and Spanish bond yields are back into the 7 percent danger zone. What went wrong?

Perhaps the better question to ask is how it ever got to be conventional wisdom that maintaining the Greek status quo was the reassuring option? Greece’s economic woes have, as ever, short-term and long-term elements. In the short-term, this election outcome means continuing to stay the course of fiscal austerity and made-in-Germany monetary policy that’s indifferent to depression conditions in Greece.

The idea is supposed to be to suffer through this while working on structural reforms to boost Greece’s long-term competitiveness. But how is this supposed to work? Greece has been mired in decades of endemic corruption and malgovernance, since emerging from a military dictatorship in 1974. Both New Democracy and Pasok have acted more as brokerage organizations than ideological parties, and both have used the state primarily as a patronage mill rather than a provider of services. Both endorsed the plan to get Greece into the misguided single currency, and both contributed to the budgetary malfeasance that made Greece the fiscally weakest member of the union. It is extremely difficult to say what aspect of this problematic situation is supposed to be resolved by having Greece’s two corrupt historically dominant parties govern together in coalition. It is even harder to see what is helped by having European Union officials essentially insist that Greek voters re-elect the corrupt insider parties, while simultaneously insisting that only improved domestic governance can be Greece’s salvation.

This, however, is the central paradox of the European elite’s approach to the entire continent-wide situation. Having blundered into disaster, they’re notionally insisting on dramatic change while in practice insisting that nothing ever change.

Across the continent, “responsible” political parties are now defined by their fealty to the failed alchemy of bank bailouts, tax hikes, tight money, pension cuts, and aspirational labor market reforms. Some of these ideas make sense in isolation, but they add up to a pile of nonsense. The idea is for each country separately to imitate Germany’s success in the early aughts by improving productivity without increasing wages in order to boost exports. But exports to whom? During the time in question, German savings were plowed into lending to other European states where they financed consumption of, among other things, German-made export goods. To reverse the process would require symmetrical change, not simply other states imitating Germany. Yet German officials consistently deny the basic mathematical reality that exports require importers, and saving requires debtors.

Since all sensible parties have signed on for nonsense, the only people making sense are from the fringes.

Italy’s clownish Silvio Berlusconi, having been forced from office in a European Central Bank coup, is rightly noting that Italy would likely be better off ditching its currency and regaining monetary sovereignty. It was Geert Wilders, leader of the Netherlands’ viciously anti-Muslim far-right party who pulled the plug on the mainstream center-right party’s destructive domestic austerity agenda. Syriza in Greece, for all its other flaws, argued plausibly that you don’t fix a corrupt system by re-electing its architects.

But instead of considering a change in direction, Europe’s powers that be—most of all in Germany and the European Central Bank—just yesterday endorsed a new “grand vision” that in fact represents more of the same. There’s a growing awareness that you can’t have separate national banking systems amid a single currency, but a real unified system of deposit insurance would require German money, so the vision features a fudge rather than a real plan. Instead “the plan will push for countries to remove the regulations and layers of bureaucracy that inhibit competition, keep young people out of the work force or make it difficult to start a new business.”

These are worthy aspirations for the long run, but are curiously unresponsive to the crisis. Spain’s unemployment rate was 7.9 percent at the peak of the business cycle in the spring of 2007—a clear sign of a country with some bad labor market regulations. And, indeed, at the time getting Spain to reform its labor markets was a key priority of the European elite. Today, five years later, joblessness in Spain has tripled—a problem that can’t be attributed to long-standing regulatory problems and can’t be solved by addressing them.

Peripheral countries need either more fiscal support from Germany, greater inflation tolerance from Germany, or monetary independence from Germany so they can pursue the former two objectives without active German cooperation. It’s easy to see why Germany is not thrilled about these options, but the facts are the facts nonetheless. And the longer the German government and the institutions it controls insist that mainstream parties sign on for the triple-nein, the more inevitable it becomes that extremist groups will take over sooner or later.