There are hopeful signs the message is getting through. Last week, in the heart of Exarchia, the rundown bohemian district of Athens, many residents continued to harbour deep resentment for “the rich,” “the banks” and the IMF. Yet some, like Nikos, a 29-year-old graphic designer who still lives at home with his mother, recognize they, too, have played a role in bringing profligate Greece to the brink of insolvency. Everyone is to blame, he told Maclean’s. “We can’t just blame the 300 [MPs in parliament]. There are 11 million of us in Greece. It’s a whole bordello here.” Adds Angeliki, a bartender: “Everybody thinks about how to steal money. They’ve been doing it for the last 60 years. Now we’re broke.”
Such realizations on the part of Greeks are good. Unfortunately, Europe could face much bigger problems before this is done. “The bailout for Greece may be painful but it’s manageable,” says Kopstein. “Where things would get weird is if one of the big economies went, like Spain. If that happens, all bets are off.”
If the news coming out of Europe about financial contagion has a familiar ring to it, that’s because we’ve seen this before. In 2008, as the subprime crisis gripped Wall Street, vultures circled the big banks and insurance companies, speculating on which one would fall next. The bailout of Greece was meant as a vote of confidence to put an end to such speculation. It hasn’t worked. Now many see it as just a question of which country will be hit next. “It’s not a question of the danger of contagion,” the secretary general of the Organisation for Economic Co-operation and Development, Angel Gurria, said recently. “Contagion has already happened. This is like Ebola.” And with stock markets in Canada and the U.S. tumbling on fears about Europe, it’s clear no place is safe.
Around the same time that S&P, the debt rating agency, cut Greek government bonds to junk level, it also took aim at Portugal and Spain—the latter saw its debt rating fall to the same level as Slovenia. Many see Portugal as the next likely country to require some sort of assistance from its partners. But the bigger fear is if Spain falls. That’s because while Greece and Portugal each account for just two per cent of the European economy, Spain makes up one-tenth of Europe’s GDP. “Frankly there would never be enough resources in Germany or France to bail out Spain,” says Philipp Bagus, an associate professor of economics at Madrid’s Universidad Rey Juan Carlos. “It would actually push them to the edge of bankruptcy.” Indeed, David Mackie, chief European economist at JPMorgan, warns the bailout cost for Greece, Portugal and Spain could hit $800 billion. Other estimates have topped $1 trillion.
Spain is by no means certain to get hit. While it has a larger deficit than Greece, Spain’s debt relative to its GDP is half the size. Yet the country faces its own set of acute problems that make it susceptible, not the least of which is raging unemployment. Last month Spain’s unemployment rate hit 20 per cent, while for youth it’s as high as 40 per cent. Some economists fear that as Spain enforces its own austerity measures, that will slow the economy even further—making the relative size of its deficits grow, rather than shrink. But Bagus says Spain has yet to take its debt crisis seriously. “The austerity measures that have been put in place aren’t even worth calling austerity measures,” he says. “If anything, this bailout for Greece sends a message to the Spanish government that it can continue to do nothing.”
Whatever the outcome, Europe is potentially headed for a decade of stagnation. And that has many worried. “If the immediate threat is speculative attacks, the long-term threat is low growth,” says Peter Hall, a political economist at Harvard University’s Center for European Studies. “The European political system is very vulnerable to a resurgence of the radical left and radical right, and if unemployment remains above 10 per cent in these countries for another five years, it will bring them out of the closet.”
This crisis has spawned no shortage of suggestions for how to fix Europe. Does the region need tougher penalties for countries that overspend? Or since Greece has shown how easy it is to hide staggering deficits, should Europe centralize control over spending and budgets? And would countries ever agree to surrender their purse strings to bureaucrats in Brussels? Europe has been able to shunt aside all of these questions during boom times. But no longer. The test now is whether the solidarity between the countries of Europe is deep-rooted enough to see it through the crisis. “A lot of people say the EU is like a bicycle that has to keep going forward to stay upright,” says Kopstein. “Once you stop going forward toward integration, the potential for pulling these things apart is very real.”
As for Mundell, the father of the euro, he’s watching all this closely. Despite all the concerns, he, like most, remains generally optimistic the euro and European Union will bind together to weather the crisis. “It’s the best game that Europe has,” he told Maclean’s from his home in Italy, a 15th-century castle near Siena.
But there’s something else that leads him to believe Europe will pull through, and that’s the catastrophe its leaders know would ensue if they fail to hold it together. “If it broke up it would be very harmful for Europe,” he says. “It would recreate the old problems again of Germany dominating the continent of Europe. As the prime minister of Greece said, there are big, drastic steps that have to be taken, but the alternatives are much worse.”
