Europe's Big Fat Greek Heart Attack

A diet can't save them now. Time to get that defibrillator ready.

Imagine being told that you will likely suffer a heart attack, yet not how big it will be or how serious. If you could get your arms around the enormity of the news, you'd want to know whether your body could stand the shock and what the aftermath of the attack would look like.

This is exactly what is going on today in policy circles -- and beyond -- as the world monitors the developments in Greece with a growing feeling of helplessness and concern. Recognition is spreading that Greece faces the rapidly rising probability of another default and, critically this time around, a potential exit from the eurozone. And governments in Europe, and increasingly elsewhere, are wondering what this means for them.

Turmoil in Greece is, of course, nothing new. For more than two years, this once-proud member of the eurozone has stumbled from crisis to crisis, with mounting social costs and deepening economic and political dysfunction. That said, the situation did take a nasty turn for the worse last week as reports surfaced of ordinary citizens rushing to pull their money out of domestic banks, fearing for the safety of what remains of their savings.

The question now is whether the policy response is able to step up to this further twist in the protracted Greek tragedy, especially as bank runs can easily get out of control. If policies lag again, this will increase the probability that Greece would be forced not just to default again but also to exit the eurozone -- what is now called a "Grexit." If that scenario unfolds, Greece will face the prospect of an even deeper and longer economic, financial, political, and social implosion -- and the world would face significant risk of collateral damage.

In public at least, European governments are standing firm about their desire to avoid a Grexit. This sentiment was stated again during last weekend's G-8 summit. But words are not enough. The governments of Europe must urgently find a way to reassure Greek depositors that their country's continued membership in the eurozone is not just desirable but also, and critically, feasible. After all, it is hard for these depositors to believe even the most reassuring words at this point -- when national politics is so messy, jobs are rapidly disappearing, and European partners are visibly and repeatedly hesitant about sending the country checks.

And the dangers are real. Should Greece be forced to exit the eurozone, it would do so without a mechanism or a precedent. Indeed, with its probability continuing to increase, a Grexit would likely prove expensive and disruptive -- and not just for Greece. Virtually every other country in the world would feel an impact -- economic, financial, or both.

A Grexit would be sure to contract further European demand, increase risk-aversion, and raise serious questions about the health of some banks and their customers. It would be a shock that would certainly dampen global growth -- but right now, it's still hard to make accurate predictions about what its magnitude and duration would be. Thus, given the degree of uncertainty, it's critical that governments -- and not just those in Europe -- make arrangements to minimize and absorb the external disruptions that could stem from a disorderly Greek exit.

Unfortunately, many countries' defenses, both monetary and fiscal, are already run down as they continue to deal with the domestic aftershocks of the 2008 global financial crisis. This is especially true for the larger European economies that are struggling with their own debt and banking challenges (such as Italy and Spain). It is also the case for the United States, where hesitant growth and political polarization undermine the safe de-levering of still-overindebted segments of the economy. Even China is slowing -- due to both immediate overheating and longer-term institutional and systemwide economic transitions.

Should Greece exit the 17-member eurozone, it is disconcerting that no other part of the global economy is in a position to step in and fully offset the resulting waves of disruptive global contagion. Meanwhile, neither regional nor multilateral coordination mechanisms can fully compensate. That said, there are a series of steps that can and should be taken now to make sure that the shocks are both temporary and reversible.

Europe needs to urgently find ways to fortify internal circuit breakers that reduce the risk of Grexit contagion becoming a self-reinforcing phenomenon, with key leadership provided by the governments of the four largest economies (Germany, France, Italy, and Spain). This involves urgently strengthening internal firewalls, enlarging emergency financing windows at the European Central Bank, establishing the basis for eurozone-wide deposit insurance, and providing a proper institutional framework and plan for channeling co-financing from the rest of the world. In addition, to simultaneously secure the underpinning of what would remain of the eurozone (which could possibly be fewer than 16 countries), fiscal and growth compacts would need to be accompanied by a better policy mix at the national level as well as a more sustainable regional political integration process that lifts damaging leadership and legitimacy constraints. Finally, should Greece exit the eurozone, Europe must find a way to keep the country within the 27-member European Union, providing it also with stabilization funding and technical assistance.

Political leaders have little time to waste if they wish to reduce the immediate disruptive impact of a Grexit -- which, increasingly, seems inevitable -- and to make the messy aftermath more manageable. Recent history suggests that they are not nearly as prepared for this eventuality as we might think. Indeed, with European leaders having spent so many summits and meetings thinking about the eurozone's ill health, they won't have anyone to blame but themselves if they're not ready with the defibrillator when the heart attack does occur.



Status Update

With the stroke of a pen, a new bill in Congress could slash the number of Palestinian refugees -- and open a world of controversy.

A war is brewing on Capitol Hill. And while wars tend to create refugees, this one may result in fewer of them.

Sen. Mark Kirk (R-IL) is trying to get a handle on the real number of Palestinian refugees in the Middle East -- a move that could result in a change of status for millions of Palestinians. His proposed language for the 2013 foreign appropriations bill would require the U.S. government to confirm just how many Palestinians currently served by the U.N. Relief and Works Agency (UNRWA) -- the body tasked with providing assistance, protection, and advocacy for Palestinian refugees -- are actually refugees. The bill, slated for markup on May 22, would challenge the status of the children, grandchildren, and great-grandchildren of Palestinian refugees -- a great many of whom claim to be refugees despite the fact that they were never personally displaced in the 1948 and 1967 Arab-Israeli wars.

The aim of this proposed legislation, Kirk's office explains, is not to deprive Palestinians who live in poverty of essential services, but to tackle one of the thorniest issues of the Palestinian-Israeli conflict: the "right of return." The dominant Palestinian narrative is that all of the refugees of the Israeli-Palestinian wars have a right to go back, and that this right is not negotiable. But here's the rub: By UNRWA's own count, the number of Palestinians who describe themselves as refugees has skyrocketed from 750,000 in 1950 to 5 million today. As a result, the refugee issue has been an immovable obstacle in round after round of negotiations between the Israelis and Palestinians.

How have these numbers swelled, particularly as the Palestinians who fled or were forced from their homes in 1948 and 1967 grew old and died? This question lies at the crux of the Kirk amendment. And the answer is UNRWA.

The knock on UNRWA is that it exists to perpetuate the refugee problem, not solve it. It was UNRWA that bestowed refugee status upon "descendants of refugees," regardless of how much time had elapsed. As a result, the Palestinian refugee population has grown seven-fold since the start of the Arab-Israeli conflict. As one study projects, if descendants maintain their current status, the number of "refugees" in 2020 will be 6.4 million -- despite the fact that few of the actual, displaced Palestinians will still be alive. In 2050, that number will reach 14.7 million.

UNRWA, which calls for a "just and durable" solution to the refugee problem, has unquestionably been a silent partner to the Palestinian leadership. The agency's administration fully understands that if Israel accepted the PLO's demand, it would be demographic suicide. As Palestinian Authority President Mahmoud Abbas himself has admitted, asking the Jewish state to repatriate 5 million Palestinians "would mean the end of Israel."

UNRWA's warts notwithstanding, American taxpayers have rewarded it year after year. In the 2011 fiscal year, U.S. assistance to UNRWA stood at $249.4 million. Total contributions since its founding in 1949 amount to a staggering $4.4 billion.

In recent years, politicians and policy wonks, including one former UNRWA administrator, have called for UNRWA reform. The agency hasn't merely demurred; it has girded for battle. UNRWA set up shop in Washington with two Hill-savvy professionals, despite the fact that its operations are entirely based in the Middle East, anticipating the need for what looks a full-scale lobby effort to defend its mission. The agency even toyed with changing its name last year in an attempt to burnish its image in the West.

UNRWA's time to defend itself has unquestionably arrived. The Kirk amendment would require the secretary of state to report to Congress on how many Palestinians serviced by UNRWA are true refugees from wars past -- those who could prove that they were personally displaced. That number is believed to be closer to 30,000 people. This new tally would then become the focus of America's assistance to UNRWA for refugee issues.

Despite congressional Republicans' current fervor to rein in America's out-of-control debt, the bill's proponents do not call for a full cutoff to the descendants. Rather, they seek to ensure that UNRWA services keep flowing to those who are needy. The United States would simply not view them as refugees -- just people living in the West Bank or Gaza and below the poverty line.

But funding for the future would not be guaranteed. As Kirk's office explains, Congress will soon need to consider tough questions, like whether U.S. taxpayers should be footing the bill for welfare programs in the West Bank and Gaza, or whether such services should be provided by the Palestinian Authority.

The fact that this language has made it to mark-up is nothing short of remarkable. The Israelis have historically avoided locking horns with UNRWA at all costs. In fact, they have quietly lobbied against UNRWA reform in the past. As one Israeli official confided, the Israel Defense Forces don't want to risk being saddled with providing services to the refugees in the West Bank and Gaza should UNRWA unravel. Indeed, one of the Israelis' primary purposes in signing the Oslo Accords and supporting the creation of the Palestinian Authority was to ensure that they were no longer saddled with the responsibility of providing services to the Palestinians in the West Bank and Gaza.

But today, with the peace process moribund, if not dead, the Israelis believe that UNRWA reform could serve as a defibrillator of sorts. By tackling one of the toughest challenges of the Palestinian-Israeli conflict without the bedlam that typically accompanies bilateral negotiations, there would theoretically be one less sticking point when the stars align again for diplomacy. Under the leadership of Knesset member Einat Wilf, this idea now has the backing of the prime minister's office, the Ministry of Defense, and the Ministry of Foreign Affairs.

In Washington, a coalition is still forming. Rep. Howard Berman (D- CA), the ranking member of the House Foreign Affairs Committee, broadly backs this idea but has yet to introduce language on the House side. However, bipartisanship may not be enough: The State Department, which pledged an additional $10 million in UNRWA in March, is expected to put up a fight. The legislation would undoubtedly anger some of Washington's Arab allies, and Foggy Bottom tries to avoid that at all costs.

But such grumblings will likely pale in comparison to the expected outcry in the West Bank, Gaza, and the Palestinian refugee camps in neighboring Arab countries. The refugee narrative is a sacred one in Palestinian political culture. Palestinian leaders will not simply table it because Congress passes new legislation. Rather, it's a fair bet they will mobilize. When UNRWA merely mulled a name change in July 2011, Palestinians organized protests and sit-ins. Proposing real changes to UNRWA could even prompt violence.

In short, the Kirk legislation would strip Palestinian the descendants of their political symbolism. It would be a landmark for this generations-old conflict, but whether it paves the way for peace or conflict remains to be seen. There are few more potent symbols of the Palestinian cause. Don't expect Palestinians to give it up easily.