Eurozone Crisis: Not a Greek Drama

It has been 2,000 years since Athenian legislators last received the kind of global attention fixed upon them Tuesday. News coverage of the Greek parliament’s June 21 confidence vote captivated the global financial sector. The vote was carried live on most global 24-hour investment-news stations and links to live online feeds of the Greek vote were posted across the Web. The vote passed, giving Greek Prime Minister George Papandreou the political authority to try to pass further austerity measures mandated by the eurozone in another vote on June 28. The sharp focus on the confidence vote belies the importance of the event. Lost in the coverage is the fact that Greece constitutes 2.5 percent of eurozone GDP and eurozone member states' direct exposure to Greece is manageable. This obsession with Greece continues a trend of over-stressing the importance of single events and the supposed financial canaries in the coal mine. After a year and a half of watching the eurozone sovereign debt crisis unfold, we should put one notion to rest: no one event, crisis or decision will cause the eurozone to collapse. Such a complex system of financial and monetary relationships will not unravel in a day, a month or a year. Because the eurozone is fundamentally a political project, the weakening of the political bonds that tie eurozone member states into a currency union are what will ultimately lead to its dissolution or modification. Eurozone member states have proven highly flexible in their handling of the crisis. Three member states have been bailed out despite clear rules in EU treaties against such bailouts. A bailout fund, the European Financial Stability Fund (EFSF), has been set up as what is essentially an offshore financial institution in Luxembourg beyond the control of EU institutions, to avoid running afoul of any EU rules. The European Central Bank (ECB) has bent rules throughout the crisis. The ECB has accepted (what are now) the world's worst-rated bonds as collateral and has purchased government bonds directly on the secondary market. There remains the option of allowing either the EFSF or the ECB to buy government bonds directly, an option we do not foresee either institution shying away from if the need arises. Skeptics contend that because the eurozone was primarily a political creation, its economic logic is fundamentally flawed. A singular economic or political shock — such as the collapse of the Greek government — could therefore unravel the entire bloc by exposing a slew of economic problems. Precisely because the eurozone is a political creation, however, fundamental changes in the geopolitics of Europe are required to undermine it. Furthermore, the greater the imminent financial crisis, the greater the likelihood that eurozone member states will find flexible means to resolve it. This resourcefulness has been evidenced throughout the crisis. This dexterity stands in stark contrast to the byzantine negotiations that accompanied the ratification of the Lisbon Treaty. Essentially, it serves nobody’s interest to create a crisis that leads to a Continental and global contagion. Therefore if all else fails, the ECB will print money. The idea that the ECB would participate in its own dissolution because it is committed to its independence, or to maintaining 2 percent inflation, is a theoretical assumption that takes little account of the ECB's behavior over the last 24 months. This analysis leads us to two conclusions. First, the eurozone is not going to collapse in the middle of the sovereign debt crisis. It is in the interest of all member states to persevere through the crisis. Modifying the eurozone's membership makeup may be an option later, but attempting such a reform amid a crisis, when it could cause said crisis to spread disastrously, would be illogical. Second, fundamental political changes under way in Europe — such as the weakening of the NATO alliance, the regionalization of security alliances, and especially the developing Russian-German relationship — are far more important to the future of the eurozone than a Greek confidence vote. Because the eurozone is fundamentally a political project, the weakening of the political bonds that tie eurozone member states into a currency union are what will ultimately lead to its dissolution or modification. For that matter, these fundamental political shifts are also far more important than a slew of other supposed canaries in the coal mine, such as the exposure of investors to Greek credit default swaps (CDS) (net exposure is minuscule, around $5 billion), the supposed "ECB stealth bailout" via the Target 2 mechanism, or any other emerging indicator commentators may point to in explaining why the eurozone will collapse "over the weekend" or "by the end of the year." Monumental shifts are under way in Europe. We have no reason to believe that Greece is at the center of them. What is most interesting is that the focus, both in terms of risks and solutions, continues to be on both short-term effects and singular events. This myopia is in part because eurozone member states, in particular Germany, have not offered a long-term solution or plan. Calls to resolve the fundamental structural imbalances between Northern and Southern Europe are few and far between. This reticence is itself a sign that Berlin is not planning for the long term, which is either a gross oversight or a hint that Berlin does not plan to stick with the eurozone through the end of the decade. The eurozone can and will muddle through the current crisis — it has proven that it has the tools and required flexibility to do so. The question that needs to be asked is: What do Europeans, and specifically the Germans, plan to do with Europe’s security and political architecture in the long term? The answer to that question cannot be found in the financial databases of Eurostat or the Bank of International Settlement, nor especially in the coverage of 24-hour investor-news stations.