Expert: EU Now ‘More Vulnerable’ Than Any Time in Its History

A familiar sight returned to the street of Athens this past weekend: Violent protests over spending cuts pushed through the Greek parliament Sunday by Prime Minister Alexis Tsipras as a necessary step to receive the latest tranche in a financial bailout worth 86 billion euro ($98 billion). It’s not the only scene of déjà vu sweeping across the continent.

European Union finance ministers met Monday in Brussels to begin discussions on whether to free up new bailout cash for Greece. Dutch politician Jeroen Dijsselbloem, who heads the group, said the goal is to have a decision on the latest tranche of the bailout by May 24. Greece needs the cash to pay a $4 billion debt repayment due in July.  

The International Monetary Fund won’t participate in the bailout program if Greece isn’t given some debt relief. But Germany, Europe’s largest bailout contributor, insists the emergency lending bank must buy in regardless. And even with Sunday’s new austerity reforms, Greece will not reache the agreed-to surplus of 3.5 percent of gross domestic product within two years. The IMF and the EU both want Tsipras to find an additional $4.6 billion in cuts, something the prime minister says is impossible.

If this scenario sounds familiar, it should. Last summer, after Greece defaulted on its debt, Tsipras hit a deadlock with Europe before ultimately yielding to harsh austerity measures.

Mujtaba Rahman, the head of practice for Europe at the Eurasia Group, said there is now a 35 to 45 percent chance of new Greek elections in June, meaning that politicians who have agreed to bailout terms could be ousted from office. Cue another Greece/Europe summer standoff.

Rahman said this showdown would be different — and potentially worse — than last year’s for one important reason: the risk of contagion, or the debt crisis spreading to neighboring struggling nations and then to the entire European economic alliance. Contagion has been a dirty word in Europe since the start of the crisis in 2010. Last summer, during the Greek standoff, it was widely believed most of the financial fallout from Athens going bankrupt would be contained within Greek borders. It was a crisis of European politics more than one of European economics.

“Many Eurozone capitals firmly believe that a return to a 2010-style debt crisis, where developments in Greece resulted in ‘contagion’ to other euro area members, is no longer possible, or indeed likely,” Rahman wrote in a note circulated Monday. “We disagree. If anything, we think the euro area is more politically vulnerable today to a change in investor sentiment than at any time since its creation.”

Rahman notes two other factors contributing to contagion concerns.

First, weak economies in Spain, Portugal, and Italy also have failed to push ahead with promised austerity reforms or other programs to remain solvent. The four so-called PIGS countries — Greece is the fourth — all received bailouts during the six year European crisis to pay down debt, and would have gone bankrupt without assistance. (Ireland was once considered part of the group, but had the term removed as it returned to growth.)

In Madrid, lawmakers are no longer living up to their pledge to reduce Spain’s fiscal deficit below 3 percent. Spain’s government collapsed last week, forcing new elections in June, and leaving a dearth of authority to make changes necessary to bring the economy in line.

Spain’s neighbor, Portugal, has been governed since last year by a moderate Socialist Party (PS), in coalition with two radical left parties — the Left Bloc (BE) and Communist Party (PCP). It has already begun to roll back changes Portugal made in exchange for its bailout.

And in Italy, Prime Minister Matteo Renzi has struggled to enact unpopular tax and labor reforms.

Secondly, Berlin’s angst over Europe’s refugee crisis and the role of the European Central Bank — Germany wants it to intervene in European affairs less than its Italian partners — shows how the foundations of the coalition that came together to rescue Greece is beginning to crack.

Add to this the possibility of a Brexit, or the U.K. voting in June to leave the European Union, and there are now a number of clear fault lines developing across the continent. Britain is the alliance’s second largest economy, behind only Germany, and its’ departure would cost the EU about $3 trillion in GDP. In February, ratings agency Moody’s said “the economic costs of a decision to leave the EU would outweigh the economic benefits.” It cited declining exports and “a prolonged period of uncertainty, which would negatively affect investment.”

Rahman thinks investors are ignoring this risk.

“To date, the market appears to be treating this as a solely UK affair, whereas it could have profound market and political implications for the euro zone if the UK votes to leave the EU,” he wrote.

Photo credit: LOUISA GOULIAMAKI/Getty Images