On
the morning of May 7th
2012, Greek voters woke up to discover that they had effectively
voted to leave the EU. A majority of the new members of
parliament were in parties that rejected the crippling terms of the
latest EU £110bn bailout package. It looked like the beginning of
the end for the 11 year old European single currency. The cracks in
the European Union began to look unbridgeable
Bond
investors across the world reached for their phones. Many financiers
decided that the euro was finished, and they placed their massive
bets accordingly. It was reported that Lord Rothshild of the banking
dynasty, had personally taken out a £130m“short” position
against the battered single currency. Surely, the EU could not
recover from this! If Greece fell, then so would Ireland, Spain,
Portugal and Italy which were all in the same deflationary boat –
saddled with over-valued currencies, forced to cut spending in a
recession, crippled by unsustainable interest rates on their massive
debts. A new word was coined to describe the countries on their way
out: “Grexit”
Europe's
political leaders seemed caught in the headlights; unable to
reconcile the need for fiscal discipline with the imperative of
restoring economic growth. In Greece, where the economy had shrunk by
20%, violent social unrest had become an almost weekly occurrence as
EU-imposed cuts made the recession even deeper. In Spain,
unemployment among under 24 year olds rose to over 50%.. And the
contagion began to infect the entire eurozone as France lost its
triple A credit rating and Germany, the most powerful economy in the
EU, plunged toward recession.
In
Britain, the political classes awaited the inevitable. Most of the
British media had decided long since that the euro was a dead duck
and that it was only a matter of time before it collapsed. You cannot
have a single currency without a central government and a central
treasury, with the power to intervene in national budgets and the
power to issue bonds for every member state. Surely, Greece and Spain
would see sense and leave the euro, devalue their currencies, default
on their debts like Argentina in 2001, and seek to recover on the
basis of low wages and cheaper exports. What alternative did they
have? Sticking with austerity was leading to economic depression and
social unrest.
But
somehow, the inevitable didn't happen. The Greek political parties
couldn't agree on a government and decided to hold another election
on 17th
June. This left the pro-austerity New Democracy, led by conservative
Antonis Samaras,
with
a reasonably firm mandate to stick with the euro, bailout and all.
Greece would not default. Then, Mario Draghi, the head of the
European Central Bank, announced that he would do “whatever it
takes” to stop the single currency collapsing. Many believed this
was just another empty promise from a bankrupt eurocrat, but Draghi
proved true to his word. In September the ECB committed itself to
unlimited purchasing of european government bonds, and the sovereign
debt crisis began almost immediately to subside. The rate of interest
on Greek, Spanish and Italian debt returned to pre-crisis levels.
