Greece is burning. Not that this is a new phenomenon. But it sounds so sinister, so ominous.
When you find out why it's burning, it becomes a tragicomedy. The Greek government -- led by unelected economist Lucas Papademos -- promises to slash the safety net of many Greek citizens for a big sack of bailout money. Ordinary Greeks, whose futures are being mortgaged, are very angry. Things burn. Then everyone goes home and waits for the money to arrive.
The process repeats with such frequency that a lengthy Wikipedia page has sprung up to catalog each outburst, hence the tragicomedy. And why shouldn't the country erupt in flames every so often? The country is a tinderbox with half its young people unemployed and 20% of the broader populace jobless.
Greece has never been much more than the first domino. One is all you need, and few of Europe's dominos are stable at the moment. How many fall, and how far the chaos spreads, is not something anyone can predict with accuracy. But this repetitive charade of punishment and protest has done nothing to steady the pieces. At some point, European leaders will have to decide whether unity is more important than stability.
Lined up and ready to fall
More important issues have been pushed to the back pages by the struggles of Greece, a small rocky nation of professional tax dodgers that contributes about as much to the global economy as the state of Maryland. Take the upcoming French elections. Nicolas Sarkozy may lose badly. With four major candidates in the running, Sarkozy is polling second, 8 percentage points behind a politician once mocked as "Mr. Pudding."
The threat is so dire that German Chancellor Angela Merkel will actively campaign for Sarkozy ahead of April's vote. This international political alliance has sparked a countermovement, with Francois Hollande -- Mr. Pudding to you -- stumping for Germany's anti-Merkel Social Democrats and lending his support to Spanish Social Democrats as well.
The Merkel-Sarkozy (or Merkozy, if you prefer) alliance has been crucial to a unified EU. Despite cultural and social differences, Merkozy have moved mountains to bring the EU closer together. Already this year, a fiscal stability treaty has been approved, further empowering Europe to directly influence its member states' economies. The French government will not ratify the treaty until after April's elections, and Hollande has gained popularity in part because he refuses to do so. If France rejects the treaty, there's little reason for other member nations to uphold it. But Merkozy's fiscal austerity has done little to fix the EU's problems, so perhaps there's little reason to continue down that road.
It's all downhill from here
This Wednesday will offer critical information on the state of the eurozone economy. Fourth-quarter economic estimates for eurozone nations will be released then, which may well corroborate earlier predictions that the region is sliding into recession. Other indicators bear out this belief. Eurozone retail sales fell during the holidays. German factory orders plummeted. EU-wide unemployment rates are testing heights not even reached during the last recession.
Total Unemployment, October 2009*
Youth (16-25) Unemployment, October 2009
Total Unemployment, December 2011
Youth Unemployment, December 2011
Source: Eurostat via Google Public Data. Seasonally adjusted. *October 2009 represents highest unemployment rate in the U.S. during current period.
Many Europeans may not have noticed the slide. The EU's anemic GDP growth rate collectively nudged above 1% just once in the past decade and suffered a shallower plunge by far than the United States in 2009. The EU recession has been one wrong step away for years. Now that a recession is imminent, the effect on global commerce might be more of a glancing blow than a knockout punch.
So what comes next? The long-term consequences of a possible Sarkozy defeat are uncertain. Events in France could cascade across the continent until leaders decide to emulate the evident success of American stimulus efforts instead of tightening the austerity vice. Or little may ultimately change. Political rhetoric rarely survives whole once the heat of campaigning gives way to the reality of governance.
Whatever happens, the EU is in no shape to be the engine of future global growth. Its birth rates are too low to support population expansion. Abysmally high unemployment isn't likely to encourage immigration. The economy may face recession for a period of time or bounce back toward mediocrity. The consequences of systemic unemployment at this scale take years to fully play out.
The markets don't really care about any of that for the moment. Many Greek stocks have bounced to the moon since the start of the year, with National Bank of Greece (NYSE: NBG ) up 94% and DryShips (Nasdaq: DRYS ) up 58%. It may be many months before the full measure of Europe's efforts can be known, but investors can still try to make that dead cat bounce.
American markets might fall when Europe accepts its harsh reality, but probably not for too long. 1997's Asian Contagion dropped the Dow (INDEX: ^DJI ) 1,100 points in October from highs set that summer, but new records were set by the following February. The Mexican peso crisis offered barely a speed bump. Russia's 1998 default set the Dow back all of four months before it resumed its march toward five-digit territory. If Europe had followed this familiar script, the Greek crisis would have been resolved a long time ago, quite possibly with fewer riots and less extended pain.
Granted, the eurozone has greater global economic importance than did the Asian nations, or Mexico, or Russia. Things may decline more sharply than most expect. But the eurozone has been more a rusty machine cranked by -- and feeding into -- Germany, and less a long-promised engine of continent-wide economic growth. If one of its many gears pops out, we might not notice as much as hysterical headlines might have you believe.
Today, Greece burns and the market celebrates. Maybe the endgame is finally coming. We can only hope.