With the next chapter of the Greek debt crisis soon to unfold in Athens, Greece, investor confidence in the eurozone is far from restored. Ahead of Friday’s revelation of SEC charges in the Goldman Sachs’ (NYSE:GS) scandal, the euro was headed toward further declines while Greek bonds had been trading lower for the fourth consecutive day. While an easy target, identifying Greece as the culprit for these ongoing declines fails to consider the broader, systemic issues that plague the eurozone. That is to say that the eurozone’s troubles do not end with Greece, but rather they begin in Athens.
The handling of the Greek debt crisis on the part of the European Union exposes a fundamental weakness of the trading bloc. In order for the EU to function as a cohesive unit, central interests must act as the guiding force behind all policy decisions. However, member states will necessarily act in a manner that is consistent with their own self-interests. The inherent contradiction between those two interests has thus produced the inharmonious face that the EU has projected during its ongoing wranglings over Greece.
Striking, however, is the shared, though incorrect, view among EU member states – Germany being the notable exception – that a Greek bailout is in the EU’s central interest. The significance of the Athens meeting, then, greatly exceeds the relatively trivial issue of Greek debt. Should the EU accomplish its stated objective in Athens – resolving conclusively the terms of an EU-led Greek bailout – it will have accomplished far more than the mere provision of temporary relief to Greece. In effect, the EU will be setting the precedent for a bailout culture, which will greatly undermine both its shared currency and financial stability going forward.
The subordination of stringent financial standards to concessions that accommodate fiscally irresponsible management has already commenced in the EU. At this point, the Stability and Growth Pact, which prescribes limits on deficit- and debt-to-GDP ratios, may as well be torn asunder. Indeed, the European Commission had to go so far as to admonish member states for using Enron-like standards of accounting to meet the prescribed limits.
Among the more egregious departures from fiscal responsibility is that of Portugal, which will see its debt-to-GDP ratio balloon to 86 percent this year. Facing stagnant growth in the years ahead, it is but a matter of time before market financing for Portuguese debt runs dry. An urgent meeting to be convened in Lisbon will inevitably follow in order to discuss EU-led financing measures for Portugal.
Indeed, what began as a Greek bailout will ultimately result in a domino effect of aid requests across the eurozone. Market financing will quickly run dry for one EU member state after another, leading to the subsequent bailouts of Portugal, Ireland, Italy and Spain (among others) in rapid succession.
Surprising, then, is the ire that Germany’s hard-line stance on bailouts has drawn from many of its counterparts in the EU. There is no doubt that the future of the eurozone will be determined in Athens on Monday. A Greek bailout, while perhaps a short-term remedy, will only poison the trading bloc in the months ahead. There is but one solution to the ongoing troubles facing the EU that supports its survival and that of the euro itself: Ailing members must be immediately expelled before they infect the community as a whole. Otherwise, the dissolution of the eurozone is just a matter of time.
Disclosure: Author is short EUR/USD