May 11, 2012

How the euro zone will try to bring Greece back into line

The Peterson Institute’s Jacob Funk Kirkegaard — who I’m hoping will let me call him J. Funk — games out how the euro zone is likely to respond to the recent elections in Greece:
When faced with this type of electoral upset in small member states, the EU has historically adopted two distinct response strategies, one aimed at voters and the other aimed at recalcitrant political leaders.

The first strategy was employed in 2009 when the Irish first rejected the Lisbon Treaty reforming the European Union. Subsequently, when a few meaningless revisions were added to the Treaty, the Irish voters adopted it in a second referendum. It was the threat of economic and political isolation that persuaded them to change their mind.

The second strategy unfolded at Cannes last year. It was then that the EU threatened Greek political leaders with economic ruin (in the form of a euro exit) in order to force them to rethink their response.

Both these strategies were designed to overcome member state democratic processes and get to the “right answer” for the European Union as a whole.
And if that fails? “It would be reckless to force Greece out without adopting the type of 10-year plan for euro area integration called for by Mario Draghi, the ECB president, including steps like a banking union and a road map toward eurobonds and a common fiscal policy,” writes J. Funk.

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