Posted on Thursday, October 13th, 2011
First published in New Scientist, 12 October 2011.
Greece is going to default, one way or another, that much is clear. The bigger question is whether it will also leave the Euro and what that would mean. What is so far underappreciated is that a Greek exit would have appalling consequences not only for the world economy, but also the climate.
Just three months after the second Greek bailout, the country is failing to deliver its end of the bargain, and bond markets are signalling it will repay only half its debt. The ‘troika’ – the IMF, EU and the European Central Bank – is struggling to deliver a third rescue package, which would amount to a ‘managed default’, with a massive €2 trillion rescue fund intended to prevent contagion.
Even if all that succeeds – and the performance of Europe’s leaders so far has not been encouraging – the wild card remains Greek politics. The economy has already shrunk by 6%, and the country is wracked with strikes, riots and daily protests. The BBC reports crime is soaring and the suicide rate has risen 40%. Swingeing cuts to jobs, wages and pensions were passed by a parliamentary majority of just 5, and it would not take much of a political shift – perhaps only the emergence of a populist leader, or a general – for Greece to abandon all its debts and the single currency.
Departure would be economic suicide, says Paul Donovan, an economist at UBS, but “you should never underestimate the irrationality of politicians”. Mr Donovan calculates the Greek economy would shrink by half in the first year, as the new drachma plunged in value, international trade ground to a halt, companies went bust, and millions were thrown out of work.
More importantly, the Greek exit would force other weak countries to abandon the euro, as a run on their bonds, banks and companies rendered them unfinanceable. Ireland, Portgual, Spain, and even Italy – downgraded twice in the last month – could go. In the chaos it would be a short step to the complete breakup of the euro. Amid mass sovereign and corporate defaults, a continent-wide credit crunch would lead to a deep recession at the very least. “It really is an unthinkably bad scenario”, says Mr Donovan.
The climate always takes a back seat when economies turn sour, but the impact of a euro breakup would be profound and long-lasting. Any country leaving the euro would also breach the treaties of Mastricht, Lisbon and Rome, and therefore be forced to leave the single market and the European Union. So a euro breakup is likely to shatter the EU, and with it the hard won architecture of climate policy.
For a start, the Emissions Trading System would be unlikely to survive the collapse of the currency in which it is denominated. True, the EU ETS has been widely criticized for being ineffectual – with certificates currently languishing at less than €11 per tonne of CO2 – and many argue a carbon tax would be cheaper and more effective. But the system is what we have, and crucially imposes an international framework which, however weak at present, could be strengthened and expanded in future. That would all be swept away by the collapse of the EU, along with any obligation for countries to deliver their 2020 targets on emissions reduction, renewables capacity and energy efficiency.
But so what? Given the scale of the likely economic collapse, emissions would plunge too. In the 2009 recession, Europe’s GDP shrank 4% while total emissions in the EU27 dropped a little over 7%, according to the European Environment Agency. If the cost to countries leaving the euro is between 25% and 50% of GDP, as UBS suggests, in a euro breakup European emissions would fall far below any existing targets. And emissions could stay low for many years: Stephen King, the chief economist of HSBC, has said the destruction of the single currency would threaten “another Great Depression”.
On that basis, the collapse of the EU, so long in the vanguard of climate policy, could ironically be seen as the best outcome for global warming. But nothing could be further from the truth. Because while emissions would fall dramatically, so would our ability to do anything about the remainder.
The IPCC’s most recent assessment says holding global temperature increase to 2C means cutting emissions by up to 85% by 2050. But that assessment does not include the impacts of so-called ‘slow feedback loops’ such as the melting ice sheets. More recent work led by James Hansen, director of the Goddard Institute at NASA, suggests we need to be carbon neutral by around the middle of the century and carbon negative thereafter. Both assessments clearly require emissions to fall far more than would be delivered by Europe’s economic ruination.
Yet achieving those kinds of reductions requires massive investment. The International Energy Agency calculates that holding temperatures to +2C means the world needs to invest $18 trillion by 2035, across transport, power generation, buildings and industry. The investment needed would presumably be lower if emissions themselves had already slumped, but even so it is hard to imagine governments could mobilize anything like enough money in the midst of a grinding depression. Not only would the wealth have been destroyed, but also the political will. Which leader, for example, would dare to raise energy prices to pay for carbon capture and storage?
There is much more riding on the outcome of the Greek crisis than the future of Europe or even the world economy. The danger is that a euro collapse could destroy the capital and European institutions needed to combat climate change for a generation. A spiralling financial crisis would then spawn an environmental catastrophe. It is bitterly ironic that the meltdown of a minor economy that has little to sell but sunshine could condemn the planet to uncontrollable global warming.