The following editorial appeared in the Chicago Tribune:
Europe is coming to Chicago in the next few days and the great temptation is to set up a quarantine room at O’Hare International Airport. Our visitors have a bad case of the financial flu. We can only hope it’s not catching.
Greece could collapse in a matter of weeks when its banking system runs out of funds. The tiny Aegean nation’s economic illness could spread to the sickly and much larger economies of Italy and Spain.
That would be disastrous for Europeans and a serious problem for Americans. U.S. economic growth depends on the success of the 27-nation European Union, which, taken together, is America’s biggest trading partner. Eleven of those 27 countries have slipped back into recession.
Many of them would like to stimulate their way out of recession with government spending. But practically every nation in Europe’s southern tier has piled up way too much debt and cannot afford to keep borrowing. Germany, the strongest economy, has rightly forced austerity measures on its free-spending neighbors as a condition of bailouts.
Greece agreed to slash public spending, rewrite rigid labor rules that throttle its private sector and pay off part of its debt over time. In exchange, its banks got a cash infusion and its creditors agreed to write off more than half its debt.
In the wake of the deal, though, unemployment has gotten worse and money has become more scarce. The Greek economy has shrunk for five consecutive years, with no end in sight.
Enraged Greeks have rebelled, turning against their two major political parties in favor of the far right and far left. The country will be up for grabs in June 17 elections. If a new government rejects austerity and renounces its debt, Greece probably will be forced out of the eurozone, the common currency union.
Under the most likely scenario, the European Central Bank would stop funding its banks. To keep the doors open, Greece would have to print its own currency, which would be extraordinarily weak because it wouldn’t be backed by wealthier European nations.
Europeans already are adjusting to the idea of losing Greece. The slow-moving euro bureaucracy has acted like a circuit breaker, keeping Greece from a sudden collapse. With time to prepare, systemic risk has been reduced. Governments have made contingency plans and banks have limited their exposure. Financial firewalls are in place to keep a Greek collapse from spreading to Italy, Spain and other vulnerable countries like Portugal and Ireland.
Those firewalls, though, remain a work in progress. The economic future of Europe will be a hot topic when G-8 leaders meet this week at Camp David. German Chancellor Angela Merkel will have to stand strong against her counterpart in France, the newly elected President Francois Hollande, who just replaced Nicolas Sarkozy.
Hollande will be under pressure to make good on his campaign pledge to demand a less harsh economic agreement. Germany will be under pressure to ease on the throttle for financial discipline so Italian and Spanish voters won’t rebel as did the Greeks.
While the NATO summit in Chicago will focus on the defense alliance, you can bet the arguments over Europe’s economic future will be hot and heavy here.
If Merkel acquiesces to a less onerous timetable for government spending cuts in Italy and Spain, she’ll be caving to the folks who want to postpone the day of fiscal reckoning. Her support for ramped-up bond purchases and long-term refinancing at the European Central Bank would be less onerous, but would still risk inflation, which Germans, given their history, particularly fear.
Europe really has no choice but to work off its huge debt over time, though that will hamper economic growth. Its monetary union may wind up losing one or more members. It faces years of slow growth or no growth ... or worse.
Europe, welcome to Chicago. Please try not to sneeze.