Seventeen years into the Eurozone project, the dream of a cohesive currency union, the euro, appears to be as elusive as ever. In fact, many people would argue that the Eurozone has created more problems than opportunities for the more than 330 million people living within its enlarged borders. The six-month marathon negotiations between Greece and its troika of creditors – the European Union, European Central Bank and International Monetary Fund – last year amplified that point. While an eleventh hour deal was finally reach, it came to the dismay of the vast majority of Greek voters who were shocked to learn the stipulations of the new agreement.
Greece is an obvious candidate to be the first member-state to leave the euro. You’ve likely seen so much written about it (its brutal economy, sky-high unemployment and insurmountable debt) that the gory details don’t bear repeating with the limited space we have here. What you do need to know is that the troika handed Athens an €86 billion bailout package over three years in exchange for sweeping reforms targeting pensions, social programs, VAT and other taxes and debt restructuring. The plan also calls for Greece to initiate “more ambitious product market reforms,” which essentially means liberalization (in fact, it’s difficult to secure an IMF loan without “liberalizing”).
The six-month negotiations between Greece and its creditors were downright nasty. Greece not only refused multiple bailout extensions, it also called on Germany – its chief paymaster – to pay reparations for atrocities committed by the Nazis during the Second World War.
The real question is, under these circumstances, why did Germany and other Eurozone member-states continue to play ball with a country that was refusing to repay more than €240 billion in debt? Probably because they had no choice.
As the rest of this article demonstrates, Greece isn’t the only country struggling with the Eurozone project. A Greek exit from the 19-member currency union (whether by force or under its own accord) threatened to tear Europe apart by emboldening other radical parties in other countries to push for their own euro exit.
With Greece remaining part of the euro for now, policymakers may have avoided an imminent contagion. Long-term, however, the door is still open. After Greece, Spain may arguably be the most likely country to leave the euro.
Spain’s Podemos party shares many similarities with Greece’s ruling far-left Syriza party, such as a commitment to anti-austerity. The rise of Podemos in recent years can be seen both in voter turnout and in recent polls. The party was founded a little over two years ago, and already has a membership of nearly 400,000 strong. With 69 representatives in the lower house and 23 in the Senate, Podemos is a force to be reckoned with. Opinion polls in 2015 indicated that Podemos was virtually tied with the ruling People’s party and the opposition Socialist party. With a huge foreign debt, weak growth and the second-highest unemployment rate in the euro area, Spain is the most likely to succumb to anti-euro sentiment.
Adding to the complication is the Catalonia Independence Movement, which is gaining in popularity. According to some polls, four out of five Catalans would vote in favour of secession, a move that would have direct consequences on the euro. That’s because an independent Catalonia would automatically leave the currency union, according to the Bank of Spain.
“The exit from the euro is automatic, the exit from the European Union is implied,” Bank of Spain chief Luis Maria Linde said last year. As the independence movement continues to gain traction, it’ll be interesting to see how the fallout impacts Spain’s future in the Eurozone.
Portugal, another southern European country that has received massive bailouts from the IMF and European Union, also faces a risk of exiting the euro. Portugal received €79 billion in bailout aid during the European debt crisis. To unlock the aid package, the government agreed to an Economic Adjustment Programme, which included several budget deficits and austerity measures. The austerity measures included tax increases, freezing all existing tax benefits, higher fees for health services, public sector wage freezes and a reduction in the public workforce.
As one could imagine, the austerity conditions were rejected by a huge swathe of Portuguese voters, who effectively kicked out the ruling right wing party in the October 2015 parliamentary elections. The anti-austerity left-wing coalition was formed after it achieved 51% of the vote. However, the far-left coalition was denied parliamentary prerogative by President Cavaco Silva, who deemed it too risky to govern. This sparked a political crisis that eventually led to a vote of no-confidence for the minority right-wing government just one month later.
Cavaco summarized his refusal to appoint the left-wing coalition by stating that the majority of Portuguese voters didn’t want to return to the escudo, which is Portugal’s pre-euro national currency.
“In 40 years of democracy, no government in Portugal has ever depended on the support of anti-European forces, that is to say forces that campaigned to abrogate the Lisbon Treaty, the Fiscal Compact, the Growth and Stability Pact, as well as to dismantle monetary union and take Portugal out of the euro, in addition to wanting the dissolution of NATO.”
He added, “This is the worst moment for a radical change to the foundations of our democracy. After we carried out an onerous programme of financial assistance, entailing heavy sacrifices, it is my duty, within my constitutional powers, to do everything possible to prevent false signals being sent to financial institutions, investors and markets.”
Portugal remains in hot water with a total debt that is 370% of GDP (worse than Greece). Net external liabilities are a staggering 220% of GDP.
As the once emerging centre of European finance, Ireland faced a crippling economic downturn following the 2008 financial crisis. The country was decimated by bank runs and bankruptcies, which eventually lead to a massive €130 billion bailout courtesy of the EU and IMF. Ireland exited the bailout in December 2013, but not before sweeping anti-austerity and fiscal referendum protests. Many Irish are of the opinion that their economy was held hostage by the terms of the bailout,which included deep fiscal, banking and structural reforms.
However, with economic growth accelerating at a rapid pace in 2015 and unemployment finally back below 10% for the first time since the crisis, Ireland appears to have weathered the storm. Given these realities, Ireland appears much less likely to succumb to a euro exit before the previous three countries on the list.
Italy is the largest economy of the struggling southern European nations. While it stands a much smaller chance of exiting the euro than Greece, Spain or Portugal, an Italian exit would likely be much more catastrophic. The country faced a complex restructuring following the 2008 financial crisis, whose remnants are still being felt today. However, when compared with its neighbours, Italy’s bailout terms have been described as “too good to be true.”
According to Reuters, the Italian bank resolution fund provided €3.6 billion to restructure four falling lenders, leaving the public purse out of the equation. However, Italian bank depositors and taxpayers will still fork over annual levies to allow the fund to pay off the loans.
Despite ongoing restructuring programs, Italy’s economy is still around 10% smaller than pre-crisis levels. Economic growth has been nascent, with the country bobbing in and out of recession over the past five years. Although a euro exit doesn’t appear on the radar, Rome has probably thought about devaluing its way out of recession should the opportunity arise. In this case, “opportunity” would likely entail a string of smaller countries exiting the euro first. For this reason, Italy is unlikely to exit the euro before its other southern European counterparts.
The Greek debt saga made one thing clear: policymakers are committed to making the Eurozone work, at least for the time being. The reality is, as flawed as the euro might be, an exit by any of its 19 members could have catastrophic consequences on the one-currency project.
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