New Year, Old Problems in Europe.
by George Friedman
A new year begins and old problems keep coming back in the European Union. The holiday season was particularly short for European politicians, and if the first weekend of the year is any indication, 2015 will be another volatile year for the continental bloc.
More than six years into the crisis, Europe is once again debating whether Greece will — or should — leave the eurozone. On Jan. 3, German magazine Der Spiegel wrote that Berlin thinks that if left-wing party Syriza wins Greece's Jan. 25 elections and seeks to renegotiate the country's debt, Athens would probably have to leave the eurozone. The report also said, however, that the German government believes the currency union is more prepared to withstand a "Grexit" (Greek exit) now than it was before. Former crisis countries such as Ireland and Portugal are growing again, the European Union has a permanent bailout fund to deal with potential crises and banks have cleared up their balance sheets.
A German government spokesman declined to comment on the article but said Berlin expected any new government in Athens to honor Greece's commitments with the European Union and the International Monetary Fund. German Vice Chancellor Sigmar Gabriel said that Germany wanted Greece to stay in the eurozone but that Greece's departure would not be as tragic today as it would have been in the past.
Berlin is sending political messages to both the domestic and foreign audience. It is telling Greek voters and politicians that leaving the eurozone is a real possibility if Syriza pushes for a renegotiation of Greece's debt. It is also telling German taxpayers that their money will not be given to a country that refuses to introduce reforms. The German government is struggling to find a balance between the need to preserve the eurozone and the need to ensure that Greek authorities honor their promises. This is precisely the struggle Berlin faced between 2010 and 2012, when Athens was given two bailouts and was allowed by the European Union and the IMF to restructure its debt.
Gabriel may be right when he says the risk of contagion is somewhat lower than it was in 2011 or 2012. But as the main contributor to eurozone bailouts, Germany would be among the largest victims of a Greek default. More important, Berlin is worried about the political and psychological effects should Greece leave the eurozone. If Greece departs, others could follow. In many countries, including Spain and Italy, popular political parties are campaigning on debt restructurings and leaving the euro. Once the taboo of leaving the euro is broken, the consequences are impossible to predict.
It could be argued that Berlin has called the Greek politicians' bluff. Like Syriza, the current Greek government has repeatedly used the threat of default against the European Union, and Berlin wants the Greeks to know that it is prepared to pay the price of Greece leaving the currency union. But even if Germany is pressuring Athens, one fact cannot be denied: Greece's debt is unsustainable and will continue to generate problems for the eurozone.
Spain is watching the situation closely. It will hold elections by the end of the year, and the conservative administration in Madrid is dealing with the rise of Podemos, a left-wing party that shares Syriza's views on austerity and debt. Some sectors of the Spanish government believe that a Syriza victory would lead to political and financial chaos in Greece, indirectly hurting the popularity of Podemos.
The weekend also offered a glimpse behind the scenes at the political situation in the United Kingdom. On Jan. 4, Prime Minister David Cameron said he would be "delighted" to hold an early referendum on Britain's membership in the European Union if his party won the general election in May. (The referendum is scheduled for late 2017.) The elections will probably lead to a fragmented Parliament and difficult negotiations to form a government. Like Greece and Spain, the two-party system is in crisis in the United Kingdom, and the conservative government cannot rule out cooperation with the Euroskeptical UKIP.
Cameron's statements are meant to keep the door open for some kind of post-election cooperation with UKIP as well as to appease the Euroskeptical factions of the Conservative party and bring the European Union to the negotiating table. Most of Britain's demands, which include reforming immigration norms and regaining sovereignty from Brussels, would require a treaty change, which Germany opposes. Cameron will meet with German Chancellor Angela Merkel on Jan. 7 to discuss ways to keep Britain in the union without making significant reforms to the continental bloc. One thing is certain: The European treaties will not be reformed before 2017.
The weekend's moves in Germany, Greece, Spain and the United Kingdom show that fear is one of the strongest forces keeping the European Union together — arguably stronger than conviction. In some cases, there is a deep fear of the unknown consequences of leaving the euro, both for the country that leaves and for the countries left behind. In others there is fear of new political forces replacing the traditional elites that built the European project. On Jan. 5, a spokesman for the European Commission said eurozone membership was "irrevocable." The statement was a combination of wishful thinking and fear of the unknown. Debt, financial assistance programs and membership in international organizations are basically contracts, and contracts can be ended if one of the signatories feels that honoring an agreement is more costly than breaking it.