Greece’s future in EU hangs in the balance

Saying anything definitive about the Greek crisis at the moment is extremely hazardous as the situation is changing from hour to hour. 

The Greek government has applied to the European Stability Mechanism (ESM) for a further three-year bailout problem.

That means that the country met the deadline for the submission of further restructuring plans from the government, aimed at assuring the country’s creditors that the government is serious about addressing the deficiencies in its economy and its general governance structure.

The obvious aim of creditors is get paid back what it is owed to them, but that of course will be heavily determined by the efforts that will be made to address the serious shortcomings in the whole Greek structure.

By Monday morning we should have a very clear view of whether Greece will remain a part of the eurozone or not. If the answer is not, then the future of the country in the EU will be very much up in the air.

It has been difficult to answer for a number of months with any degree of confidence if Greece would eventually be forced out of the system or not.

If one applies economic analysis then the answer is pretty clearcut. Greece has struggled badly within the euro and has failed abysmally to abide by the disciplines inherent in being part of an economic, monetary and currency union.

It is worth pointing out that Greece is not alone in this regard, but is a rather extreme example.

Greece should never have been allowed to join in the first place, but the country was allowed fudge its economic statistics to qualify in what was another massive victory for politics over economics. The economy and its people have subsequently paid a very high price for this folly.

Against this background, Greece should leave the system, and would ultimately be better off doing so. So applying economic reasoning, the answer to the question is pretty clearcut. However, if one applies politics to the analysis it becomes a lot less simple.

At one level, the eurozone authorities cannot accede to the demands of the left-wing government, as that would just give a massive boost to other ‘radical’ parties around Europe, and could seriously alter the European political landscape over the coming years and render EU governance, at least in its current form, virtually impossible.

On the other hand, a Greek exit from the system could push the country into the willing arms of Putin’s Russia, which would significantly increase Russia’s influence in a strategically important part of Europe. The EU would not and should not desire that.

Furthermore, it is clear that over the past eight years of global economic and financial turmoil, the cement that has prevented the eurozone from breaking up has been steadfast political will and a belief in the irreversibility of the whole project.

If one small part were to be chipped off, regardless of how small or economically challenged that country is, the veneer of irreversibility would be permanently damaged, and this could have serious repercussions further down the road as regions within the eurozone get into difficulty, as some inevitably will from time to time given the flawed infrastructure of the whole mechanism.

Weighing up all of these factors, there has been a feeling that eurozone political leaders would do whatever it takes to keep Greece within the system. This weekend will probably reveal if those instincts have been correct or not.

Markets have been surprisingly unfazed by the Greek situation, and in fact the euro has strengthened in recent days.

However, of far more concern than the Greek situation is the crisis that is now erupting in China.

The equity bubble is bursting in ferocious fashion and this will inevitable have negative implications for the global economy.

It is amazing that exactly eight years after the global crisis erupted, the reverberations are still being felt all over what is still a very unstable world.