Tag Archives: Greece

Greece’s Economic Crisis and the Future of the Eurozone

Greece failed to make a €1.6 billion payment due to the International Monetary Fund yesterday, making it the first developed country in the world to default to the IMF. The Greek government had asked for a postponement of the payment to permit the country to conduct a referendum on a series of austerity measures demanded by its creditors to extend repayment. After European Union negotiators refused, it was not clear how Greece would respond.

This morning, Greek Prime Minister Alexis Tsipras said the country would “conditionally accept” most proposed austerity measures, but he also indicated that the national referendum on the measures would proceed to a vote on July 5 as scheduled. If voters reject the austerity measures, as Tsipras has campaigned for them to do, Greece’s future in the Eurozone would be cast into doubt.

What do you think? Should the Greek government accept the austerity measures demanded by the International Monetary Fund and the European Union in exchange for the loan restructuring it desires? Should Greece consider exiting the Eurozone? And what would the impacts of an exit be both for Greece and for the European Union more generally?

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Greece’s Economic Future

Less than a week after International Monetary Fund chief Christine Lagarde accused the Greek government of failing to negotiate in good faith, it appears Greece, the IMF and the European Union are no closer to reaching a deal to restructure or postpone Greece’s looming debt crisis. Greece faces a massive €1.6bn payment due on June 30. The Greek government has already indicated it will not be able to make the payment, an option the IMF says is not acceptable.

The Greek government has several options. It may compromise with the European Union and the IMF and cut spending on social services as part of a wider austerity package. But according to the Greek government, the effects of such a move would be devastating. Equally important from their perspective, it would violate a central campaign promise made by the center-left government less than a year ago.

If no agreement can be reached by June 30, Greece could default on its loan payment. If Greece defaulted, it could be forced to exit the Eurozone. No country has ever left the Eurozone so it is unclear what that process would look like or who would be responsible for making that decision.

What do you think? Can Greece reach an agreement with the EU and the IMF to avoid default? What might that deal look like? Or is Greece better off defaulting on its loan payments? Why?

The Future of Britain and the European Union

Britain's Prime Minister David Cameron

Britain’s Prime Minister David Cameron

The hostage crisis in Algeria forced British Prime Minister David Cameron to delay a long-awaited speech outlining his government’s view of the future of British involvement in the European Union. Nevertheless, in a truncated address over the weekend, Cameron asserted that the European Union is undergoing a process of “fundamental change,” and that a central component of that change must be addressing the “gap between the EU and tis citizens which has grown dramatically in recent years and which represents a lack of democratic accountability and consent that is—yes—felt particularly acutely in Britain. If we can’t address these challenges,” Cameron stated, “the danger is that European will fail and the British people will drift toward the exit.”

Cameron stopped short of calling for a referendum on British membership in the European Union, as some in his party had been calling for. Nevertheless, the thought that a sitting British Prime Minister would contemplate leaving the E.U. has caused concern on both sides of the Atlantic. According to the British Mail Online, President Barack Obama called Prime Minister Cameron, urging him to express his commitment to British membership in the EU and noting that the European Union has spread “peace, prosperity and security” around the world.

The idea that the European Union suffers a democratic deficit is longstanding. A democratic deficit occurs when organizations (like the United Nations or the European Union) fall short of living up to the principles of democracy and representation to which they are ostensibly committed. In the case of international organizations like the EU, the relative weakness of popularly-elected institutions (the European Parliament) vis-à-vis the power of the major players (the European Commission and the European Council) often lead to assertions of a democratic deficit. Yet the structure of the European Union privileges the position of Member States relative to the position of European citizens. The most powerful institutions within the European Union, in other words, are beholden to the governments of Europe rather than directly to its people.

So why all the fuss?

Cameron is likely responding more to domestic British politics than to changing dynamics or concerns at the European level. Certainly the ongoing economic crisis in Europe is a reason for concern. The threat of a Eurozone meltdown (led by Greece, but fueled also by Spain, Portugal, and perhaps even France) give reason for pause. But Britain is not a member of the Eurozone and consequently maintains considerable economic and fiscal policy autonomy.

Rather, the growing influence of euroscepticism on the domestic British political scene likely plays a greater role. More specifically three trends are driving policy reform. First, the traditional pro-free trade elements of the Conservative party have increasingly been challenged by more Eurosceptic elements, including the Cornerstone Group, which claims some fifty conservative MPs as members, including several members of the cabinet. Second, the rise of several small parties, including the UK Independence Party and the British National Party, have exacerbated these concerns. Finally, a broad level of euroscepticism appears to be gaining support among the British electorate. According to recent public opinion polling, half the British population now supports British withdrawal from the European Union.

Importantly, the United Kingdom is not alone in this respect. Eurobarometer polling data show that popular support for EUY membership was waning across many EU member states, most notably in Latvia, Hungary, and the UK, in which all are home to a majority population opposing EU membership. Every EU member state now has at least one political party with an anti-EU platform.

All of this raises questions about the future of the European Union. What do you think? Does has European integration hit is high water mark? Are we now witnessing the beginning of the end of the EU? Or does all this talk of withdrawal merely represent politically maneuvering and bluster? Take the poll or leave a comment below and let us know what you think.

The Greek Option: Monetary and Fiscal Policy

German Chancellor Angela Merkel meets with Greek Prime Minister Antonis Samaras in August.

German Chancellor Angela Merkel meets with Greek Prime Minister Antonis Samaras in August.

The Greek government met with the European Union, the European Central Bank, and the International Monetary Fund over the weekend. The meeting between Greece and the troika was intended to clarify requirements to qualify for the next round of bailout funds. Greece has already committed to more than 11.5bn euros in spending cuts and another 2bn euros in tax revenue. But Prime Minister Antonis Samaras concedes Greece is unlikely to meet expectations imposed by international lenders.

The challenge for Greece is that the plan is highly unpopular, and the country has been rocked by several rounds of widespread protest. The Greek economy has collapsed, contracting by 20 percent over the last year alone. Yet absent external relief from the IMF and EU, Greece faces the prospect of bankruptcy and potential expulsion from the eurozone. And outside of Greece, observers in Spain, Portugal, and other troubled eurozone economies are watching developments closely.

The current conundrum in Greece illustrates some of the economic challenges of the common European currency. In normal times, a common currency presents clear benefits. It facilitates closer and more efficient management of the economy, reduces transaction barriers and cost of trade between countries sharing the currency, and can help to reduce economic uncertainty.   Indeed, when the euro was adopted as the exclusive currency in the eurozone in 2002, it was highly popular, and many eurozone members enthusiastically embraced the new currency.

At the same time, though, the common currency presents a key challenge, particularly during economic downturns. Traditionally, governments have two economic toolkits available to them. Fiscal policy, advocated most famously by John Maynard Keynes, focuses on the use of government revenue (taxation) and expenditures (spending) to influence economic activity in the country. Keynes argued that in good times, governments should run a budget surplus so that during poor economic times, it would have ample revenue to spend, including running a deficit, and prevent a deep recession or depression.

Monetary policy, on the other hand, focuses on manipulation of the money supply, often through interest rates, to promote economic growth and stability. Monetary policy, which was most famously promoted by Milton Friedman, provides that governments should lower interest rates to promote economic growth, but should engage in contractionary policies (including raising interest rates) to prevent the economy from overheating. Above all, monetary policy focuses on maintaining a stable money supply and money value, and keeping inflation as close to zero as possible.

In practice, governments regularly use a combination of both monetary and fiscal policy to manage economic growth and stability. However, the eurozone encompasses a wide range of countries and economies, ranging from the economic powerhouse of Germany to the crisis-ridden economies of Greece, Spain, and Portugal, to a large number of smaller economies somewhere in the middle. The question of how to balance competing demands across all eurozone economies presents a challenge. The monetary policies that would maintain economic stability and growth in Germany are different from the monetary policies that might be used to prevent economic collapse in Greece. Consequently, the European Central Bank faces the challenge of finding a fine line to walk between the two.

The other challenge, of course, is that because Greece is a member of the eurozone, it effectively has cut off one of the two primary economic policies governments might use to address the economic crisis. While the Greek government can continue to use fiscal policy, its ability to use monetary policy to address the crisis is sharply limited by the fact that the Greek government does not control the Greek currency.

Not that leaving the eurozone would make things better for Greece. For now, it appears the Greek government is committed to remaining in the seventeen nation eurozone, and the German government is committed to helping Greece remain there. But if Greece is unable to reach agreement with the troika, exiting the eurozone, either on its own terms or aftering being forced out by the other members, may be Greece’s only option.

What do you think? Do the benefits of eurozone membership outweigh the costs for the Greek government? Should Greece make the sharp spending cuts demanded by the international community to remain part of the eurozone? How would Greece leaving the eurozone affect future economic developments in other troubled European economies, like Spain and Portugal? Let us know what you think by leaving a comment or answering the poll question below.

Greece, Israel, and the Peculiarities of Parliamentary Politics

Alexis Tsipras, the leader of the rising Coalition of the Radical Left (Syriza) in Greece, has refused to join a coalition with the political parties responsible for Greece’s bailout deal, which came with harsh austerity conditions.

Parliamentary democracies (e.g., Greece, Israel) are different in several respects from presidential systems (e.g., France, the U.S.). They have different rules for government formation, elections, and frequently party representation, with important implications for the process and substance of policy.  Events in Greece and Israel over the past week provide good examples of the distinctive strengths and weaknesses of parliamentary systems.

In parliamentary systems the executive branch (led by the prime minister and cabinet) relies on a parliamentary majority for its selection and retention in power.  This means that the government must have the consent of a relatively broad coalition of parliament members–typically coming from a range of parties who don’t see eye to eye on all issues but have some basic goals or principles in common.  This system often makes it easier to pass legislation and get things accomplished, since the executive and the legislative branches are not working at cross-purposes (as can happen with “divided government” in presidential systems).  But it also means that when members of parliament are themselves divided or fragmented into polarized groups, forming a government–and keeping it in power–becomes a real challenge.  Greece’s recent parliamentary elections produced a parliament severely divided on issues such as Greece’s adherence to the austerity measures imposed by its creditors, which has made it extremely difficult to form a government.  If a government is not formed soon, new elections will be called.

In contrast, in Israel this week Prime Minister Benjamin Netanyahu averted the need for new elections and achieved a “master stroke” by inviting the opposition Kadima Party into his ruling coalition, thereby “creating the largest and broadest coalition government in recent memory, one that no single faction can topple.”  While a government needs only a simple majority of the Israeli parliament’s (Knesset’s) 120 seats, this new super-coalition boasts 94 seats.  This deal simultaneously buys time for Kadima, which would have lost seats if elections were held soon, and helps to strengthen Netanyahu’s power.  While this new government does not give Netanyahu a “blank check” (since coalition members can always withdraw), some analysts believe this move may be calculated to allow–or at least credibly threaten–bold action such as a preventive strike on Iran’s nuclear capabilities.

What do you think the politics of parliamentary systems will mean for Greece’s future in the eurozone?  For Israel’s willingness to take military action against Iran?  Would a presidential system be better able to deal with the domestic and foreign policy challenges facing Greece or Israel today?

Greece, France, and the Perils of State Sovereignty

President-elect Francois Hollande will become France’s first Socialist president in nearly two decades.

Sunday’s elections in Greece and France have sent shockwaves through Europe. The election of candidates who reject austerity (tax increases and painful spending cuts) as the path out of Europe’s financial crisis will affect Greece’s ability to make good on the conditions of its bailout and herald a clash between German leader and austerity champion Angela Merkel and the newly elected French president, Francois Hollande.

There is even talk of Greece leaving the eurozone. As reported in the LA Times today, Alexis Tsipras of the Radical Left Coalition, or Syriza, “called on other political forces in the country to ‘end the agreements of subservience’ threatening more job cuts in the coming weeks. ‘The bailout parties no longer have a majority in Parliament to vote for measures that plunder the country,’ Tsipras told reporters in Athens after laying out a five-point plan for a new government he hopes to form with other leftist forces. It includes ‘immediate cancellation’ of further public spending cuts and a moratorium on debt servicing…Those cancellations would include the 150,000 state job cuts and $14 billion in new austerity measures expected next month in order for Greece to get the latest tranche of a bailout deal reached last year.”

The reason why the European Union, the International Monetary Fund, and other International Governmental Organizations (IGOs) cannot just impose their will on member states and force them to abide by their commitments is the continued dominance of state sovereignty in world politics. Sovereignty has been a bedrock principle of the international system since the Treaty of Westphalia in 1648, and it allows states’ governments to rule as the ultimate authority within their borders. While sovereignty protects states’ independence and helps to minimize external interference, it plays havoc with attempts to create authoritative supranational rules and bodies to deal with issues including human rights, trade, and arms control.

What do you think? Does the public rejection of austerity measures in Greece, France, and elsewhere make the end of the 17-member eurozone inevitable? Take the poll below and let us know your thoughts.

Levels of Analysis and the Euro Crisis

The decisions of German Chancellor Angela Merkel have emerged as a key individual-level driver of outcomes in the eurozone financial crisis.

The financial crisis unfolding in Europe provides a stark illustration of the complex interactions between system-level, state-level, and individual-level variables in contemporary world politics. Political scientists employ these three (and sometimes more) levels of analysis as an analytical device to categorize the causal “drivers” that produce outcomes in international relations.  This framework might shed light on the current Eurozone crisis as follows:

(1) The system level of analysis includes attributes of the international system and supranational actors.  The power imbalance between the wealthier and more financially secure European states, such as Germany, and those needing bailouts, such as Portugal and Greece, can be viewed as a system-level factor placing pressure on weaker states to abide by the stronger countries’ demands.  The same could be said of the “top-down” pressure from International Governmental Organizations (IGOs) such as the European Union and the International Monetary Fund on countries such as Greece and Ireland to enact austerity measures in exchange for bailouts.

(2) The state or domestic level of analysis includes factors such as political institutions, interest groups, public opinion, and political parties.  The ease with which governments can fall in parliamentary systems (as opposed to presidential systems) helps to explain the events of the past week in Greece and Italy.  The anti-austerity attitudes of public opinion and labor unions have led to political instability and a reluctance by some policymakers to agree to the harsh terms imposed by external actors.

(3) The individual level of analysis focuses on the choices, perceptions, and personalities of individuals (normally political leaders and other influential individuals).  The critical decisions by former Greek Prime Minister George Papandreou to (a)  call for a referendum on the bailout plan, and then (b) to withdraw this request and hand over power to an interim government are causal drivers located at the individual level of analysis.  The perceptions and choices by other key players such as German Chancellor Angela Merkel and European Central Bank Chairman Mario Draghi are also important individual-level factors that have shaped, and will continue to shape, the course of this crisis.

What do you think?  Do causal drivers at one level of analysis seem to be particularly influential in the current European financial crisis?  How are variables from different levels interacting to shape outcomes?  Is it possible to model these interactions and predict how all of this will end, or is such a feat beyond the skills of even our best political scientists?