The Greeks did something interesting Tuesday morning. In a highly controversial decision, Athens announced that it would pay those bondholders who refused to participate in last March's debt swap. Just 3 percent of Greece’s private creditors hold $552 million in bonds that matured Tuesday out of a total bailout package worth $222 billion.
The payout infuriated bondholders who lost more than 70 percent of their investment in the debt swap and who may go to the courts to challenge the deal. But the move also prevented a legal challenge from those bondholders who held out for full price. It is almost certain that the timing of this risky announcement was purposeful. It coincided with another saying that coalition talks had failed on Tuesday after several days of effort and that Greece will have to hold new elections probably in June.
The message is clear: Greece is not walking away from Europe, even if the leftist Syriza party, as is now expected, takes 25 percent of the next vote, putting it into a position to form a government. What Greece wants is to deal: Adjusting, not abandoning, the bailout is not the name of the game. This holds true in all the troubled countries.
Watching Europe go through its painful contortions over debt and weak economies and banks over the past year or so produces an odd sense of disconnection. There were no major elections or referendums during this period. Demonstrations (especially in Greece) provided a strong indicator of voter sentiment, but only in the past couple of weeks have voters been able to speak – first in France, then in Greece.
And they have spoken decisively. Socialist François Hollande, who enters Élysée Palace today, won handily against conservative Nicholas Sarkozy in the second round of France’s polling May 6. On the same day, 70 percent of the Greek electorate effectively said “no” to any more austerity.
For good measure, German Chancellor Angela Merkel’s Christian Democratic Union, the bulwark of European austerity, lost an election on Sunday in North Rhine–Westphalia, Germany’s most populous state, to a Social Democrat.
What are we to make of Europe at this moment? It appears to be going through a fundamental sea change. We are not witnessing a temporary accommodation of the Continent’s fiscal and economic conditions. What we’re seeing, rather, is the emergence of a new strategy, a change of course, to address the crisis. It can work. And anyone who recognizes this must also hope that the markets do not go into an unnecessary and disruptive swoon or panic about Greece’s politics, Spain’s banks, or the Paris–Berlin connection.
The first thing to recognize is that voters are not to be blamed for reacting as they have over the past couple of weeks. News media have tended to report the politics of the European crisis as if ordinary citizens are guilty and ignorant for disrupting what was otherwise a perfectly rational, well-designed austerity plan to get Europe back on its feet.
This is wrong. There is plainly something defective about a set of economic and fiscal policies that cause the kind of social and political upheavals we have seen in Europe. Any policy that pushes, say, youth unemployment in Spain above 50 percent is faulty.
It is time to acknowledge this. The fiscal and economic policy shaped largely by Germany and adopted in Brussels was bound to be a misfit when transported to Madrid, Athens, or Rome. They are simply not as strong as Chancellor Merkel or the European Central Bank seems to have assumed. Blaming voters or social democratic politicians in one capital or another is simply scapegoating.
Why is now so important? Because there is time and opportunity now – and certainly reason enough – to save Europe’s economic and fiscal policies by changing their shape such that the eurozone will not come unglued and Greece, along with all the other ailing nations on the periphery, will remain part of the currency union.
To put it broadly, this would require all sides in the European conversation to move toward all other sides. Exhibit A will come Tuesday evening, when Hollande, keeping his word, makes his first foreign journey to Germany to meet with Merkel. Hollande, a moderate socialist, has already signaled that he will do his best to accommodate the German leader and hold to France’s budgetary targets. How far Merkel will budge is the concern now.
She is strong-minded – a little bit the “Iron Lady” type. But Wolfgang Schäuble, her finance minister, already signaled a few days ago that the German central bank would accept a higher inflation rate in Germany – which is necessary if troubled economies are effectively to devalue their currencies to regain competitiveness. Anyone who knows the history of the Bundesbank knows this would be a large step indeed.
If Germany moves toward the center, Athens will have to do the same. But Alexis Tsipras, the young, fiery leader of the Coalition of the Left, as Syriza is known in English, flatly refused over the weekend to take part in any talks that would accept the Greek austerity plan. If you read his remarks carefully, however, he rejects the bailout plan as it is, not altogether. If Syriza forms Greece’s next government with coalition partners, it will quickly start to look like France’s Socialists, and Tspiras will look like Hollande.
I thought European finance ministers meeting in Brussels Monday had the right line on Athens. Tsipras, said the ministers’ chairman, Jean-Claude Juncker of Luxembourg, was simply politicking the way politicians always will before elections. “I don't envisage, not even for one second, Greece leaving the euro area,” Juncker said. “This is nonsense; this is propaganda.”
Interestingly, he also suggested that it would be possible, with a new government in Athens, to adjust some of the bailout’s rigorous targets – providing Athens accepted the overall framework. This is precisely the kind of new thinking that is needed, and there is an encouraging amount of it around.
A decade ago, France had a prime minister named Lionel Jospin. He was a Socialist, like Hollande. “Market economy, not market society” was among Jospin’s better-known positions. This is what is playing out in Europe today. In a democratic nation, where is the balance between the markets and the civic and social life of the society? Not, we can be sure, where the markets thought it was just a few months ago.