Those with short memories seem to be awfully nervous about the latest political turmoil in Greece, which, in theory, might lead to Greece’s exit from the euro zone and a fresh debt crisis involving three or four larger European nations. Such worries have contributed to a sharply see-sawing stock market to start off 2015.
A bit of history, however, suggests Greece and the euro zone will muddle through, with the bombast of Greek politicians yielding to modest pragmatism when real decisions have to be made. Here are three reasons to discount the whole prospect of Greece generating a global financial crisis by renouncing the international bailouts it has already agreed to and ditching the euro zone:
We’ve seen this show before. The first Greek scare came in late 2009 and early 2010, when Greece came up short on debt payments, leading to the original bailout. To secure international aid, Greece agreed to tough austerity measures including sharp tax hikes and steep cuts in government spending. That generated economic hardship and widespread resentment toward Germany and other donor nations that demanded the austerity measures as a condition of the bailout.
That resentment has flared episodically ever since, through populist pleas to throw off the yoke of European oppression, tell the creditors to go to hell, default on obligations to foreigners and start fresh as a proud and fully independent Greece. Protests roiled the country for much of 2011, causing fears of a popular revolt that could spread to Portugal, Spain and Italy and trigger a cascading series of defaults. More austerity measures in 2012 and 2013 met with violent protests and further fears of contagion spreading throughout southern Europe. Mainstream political parties lost ground to extremists calling for radical steps, beginning with a departure from the euro zone. By 2014, the official unemployment rate in Greece hit 28%, with economic pain fueling the rise of the leftist political group Syriza, which calls for the abolition of austerity measures regardless of the consequences.
Syriza now seems poised to win a Jan. 25 election that would make it Greece’s ruling party. So markets are poised for the prospect of an anti-bailout party calling the shots in Athens. Still, griping about government actions as a powerless opposition group is far different from bearing responsibility for the fate of the nation as its leader, and any party that led Greece out of the euro zone would end up managing a broke nation with a severely devalued currency that’s unable to borrow money in global markets. Austerity could become full-blown depression and Syriza would promptly be out on its ear. That’s why Greece has always stuck with the loathsome bailout program before, and will again.
Austerity has sort of been working. In 2014, the Greek economy began growing again for the first time in six years, and Greece was able to raise money by selling government bonds for the first time in four years, a sign of improving confidence in its ability to meet its obligations. There are still vast problems in an economy that has shrunk by nearly one-fourth since 2009, and looking back, there were probably gentler or more effective ways to bring Greece out of its tailspin. But that’s an argument about the past. The argument about the future is whether Greece should continue on a path that probably offers modest improvements, or try a risky new go-it-alone approach that could undo whatever progress the country has made during the last five years. Slow progress may not be satisfying, but it’s clearly the better choice.
Greece has little or no leverage against its fellow euro zone members. In 2010 and 2011, a financial contagion that began in Greece really could have doomed the whole euro zone, which made it essential for Germany, France, et. al. to deal with the problem. Since then, however, the European Central Bank and other authorities have implemented stability measures meant to head off a crisis should Greece implode. “Unlike in 2010–11, the euro area today has the institutions it needs to protect its financial stability,” Jacob Funk Kirkegaard of the Peterson Institute for International Economics explained recently in testimony on European bailouts. “The rest of the euro area cannot be blackmailed into consenting to granting any individual member state the lenient debt restructuring terms its national policymakers might desire.”
The time for Greece to play hardball, in other words, was three or four years ago. Today, it can still wail like a problem child — but the risks it poses to global investors are minimal.