Merkel Wields the Markets Against Greece

Stock markets falling, rumors of bank runs, contagion spreading across the Euro Zone, it’s hard not to see this as the long anticipated climax to the crisis. But instead of climax, we may be replaying a previous chapter from last fall when alarm last swept global markets over a combined financial and political crisis in Italy.

Like Greece today, Italy didn’t have a government that could deliver the austerity desired by European leadership. Berlusconi at the time was presiding over a collapsing coalition government as political allies like the Northern League broke ranks and called on him to step aside. All the while, markets turned on Italy, demanding interest rates above 7% on Italian government bonds. The country had been thoroughly engulfed in financial crisis. In the end, the markets prevailed and dislodged Berlusconi in mid November. A few days later, Mario Monti became Prime Minister as an unelected technocratic. The Italian political class submitted to European leadership and backed Monti in his neo-liberal reforms of the Italian economy, a process that still continues this year.

A similar script is now being pulled out against Greece after it voted against the political preferences of both markets and European creditors. Like Italy last fall, Greece’s economy is being made to scream until capitulation is reached. Speculation of a bank run in Greece has strangely started with government officials and media outlets as opposed to the rumor prone social media. It has the appearance of a fear campaign to alter the results of the June 17 elections in favor of centrist parties that support the austerity program. The fear campaign is already having results that would please Greece’s international credits. The latest poll numbers have New Democracy regaining enough support that it and PASOK could form a majority government.

If momentum holds, Angela Merkel will win this standoff, but victory isn’t without a cost. The showdowns in Europe  have hollowed out the Greek economy and increasingly erodes Spain, Italy and Portugal. The market turmoil alone will further worsen the downturn in southern Europe. Spain is now pouring billions of euros into its distressed banking system while markets fret over a Greek Euro Zone exit. Europe may still be brought back from the brink but not without taking serious economic damage from this standoff with the Greek electorate.

Assuming the scare tactics don’t backfire by causing a full blown bank run in Greece, we can already see the stage being set for the next debilitating standoff. If opinion polls hold up in Greece, New Democracy and PASOK rally just enough support between the two to form a government. They have the task of pushing through more austerity, provoking another general strike and showdown inside parliament and outside parliament. Under such a scenario, we will no longer be anticipating an “Argentina moment” of revolt and bankruptcy, we’ll be anticipating a Bastille moment and the toppling of the despised Greek political class.

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