Those of us who wish that the euro be brought to an end before too many people get hurt are likely to be disappointed, because European politicians refuse to admit defeat.
Greece now stands on the brink of a sovereign default. Over the last few months, the slump in the Greek economy has been much deeper than anticipated, and, as a result, the Greek government is now in urgent need of roughly $20 billion to cover its immediate financing needs, on top of the rescue package of approximately $170 billion conferred in October of last year.
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The government of Lucas Papademos is busy negotiating an orderly default with Greece’s main “troika” of lenders — the IMF, the European Commission, and the European Central Bank — as well as its private creditors. The October agreement counted on the writing off of some $130 billion worth of Greek debt held by foreign lenders, an amount equal to approximately 70 percent of the country’s total debt burden.
In Athens, the weekend was marked by hectic, yet inconclusive, negotiations over austerity measures that are a prerequisite for any further aid to Greece. Private creditors, European leaders, and the IMF insist that these measures are meaningful only if they are complemented by a thorough determination on the part of Greek politicians to bring public finances under control. This means bringing the debt-to-GDP ratio down to 120 percent by 2020 — a level that is still extremely high.
But that reduction is not going to occur unless the most optimistic of scenarios materializes and the Greek economy rebounds. So far, there have been no signs of that occurring. In 2012, the Greek economy is expected to contract by 3.7 percent, after a 6 percent fall in output last year. Unemployment is getting dangerously close to 20 percent, with almost one half of all young Greeks out of work.
The country is paralyzed by intermittent strikes and popular discontent with the technocratic Mr. Papademos, formerly a European Central Bank official and Kennedy School professor, who says that his government’s priority is to keep Greece in the euro zone. Even the head of the Greek Orthodox Church recently lambasted the government for succumbing to “foreigners’ blackmail and fatal recipes.”
Even if Mr. Papademos succeeds in cutting entitlements and improving Greece’s horrific tax-collection practices — the government loses around 15 billion euros annually to tax fraud — it is not clear where the economic growth needed to reduce Greece’s debt burden is going to come from. Some put their hopes in a range of structural reforms, which Greece has been very slow to implement, and which have been met with fierce resistance from labor unions.
The ugly truth is that Greece has a distinctly inhospitable business environment. It ranks 100th in the World Bank’s “Doing Business” report, below Kyrgyzstan, Yemen, and Zambia. Its protection of investors is worse than that of Liberia, Mauritania, and Togo. According to Transparency International, the country suffers from higher corruption levels than Brazil or China — or Macedonia, Greece’s very poor immediate neighbor.
Greece’s problems are not amenable to any easy solutions — and certainly not to solutions imposed by unelected technocrats or foreign advisers. The vast array of institutional reforms that Greece needs to get its economy on track can be effective only if they are seen as legitimate by a critical mass of the population. Mr. Papademos, catering primarily to his European counterparts and not to the Greek electorate, has only a very slim chance of creating and maintaining a strong constituency in support of the necessary reforms.
Mae West was fond of saying that “it takes two to get one into trouble.” However flawed Greece’s economy and political system might be, it would ill-advised to hand it sole blame for the present crisis. The crisis is a consequence of the utopian overreach of those who believed that European countries were sufficiently similar to sustain a currency union. While that decision was clearly a tragic mistake, it is not clear how it can be undone, especially given the strong political commitment of European leaders to the common currency. While there are ways of letting countries exit the euro zone in an orderly fashion, it appears that European political leaders would rather watch Greece implode than allow it to depart from the straitjacket of the euro in an amicable way.
— Dalibor Rohac is the deputy director of economic studies at the Legatum Institute in London.
It seems the solution to Greece's inextricably horrible fix lies within the quality of the character of the Greek citizens themselves. This is not an occasion for optimism.
If Greece is smart it will default, just as Iceland did. Iceland took their lumps early, and are already recovering. It will be some time, several decades probably, before Iceland gets back to where they were, but the alternative, to accept the IMF decrees, was tantamount to selling their nation to the highest bidder. Putting their former Prime Minister in jail was also a smart move. Let the criminals who caused the problem pay the price. Greece should default, take their lumps, and plan out how they will recover over the coming decades. This kick-the-can approach will only dig them in deeper.
The European Union was a flawed idea to begin with. It came out of the ashes of World War II when there was the thought of creating a "United States of Europe". What it has ended up as is an economically strong Germany (without the swastika) dominating everyone else whose misery they originally caused. And don't forget that Germany (West) received massive U.S. aid and protection after World War II. Also, former Soviet Bloc countries are still recovering Marxist economies. Countries like Italy are dominated by the Mafia with all of its corruption.
In Italy, the Mafia is a Sicilian debating society -- it doesn't have much political clout. But if you mean corruption and crony capitalism, yeah Italy has it's share. Berlusconi was actually a bit of a foil to that since he was too rich to corrupt.
It's silly to think of Germany as Nazis without a swastika. The EU was more a French idea than anything else, and it actually strengthened France, but their socialist programs (which they actually pay for) has finally hamstrung them and Germany's less xenophobic and provincial policies have actually been the main engine of their economy (next to America appetite for luxury automobiles made in Mexico & China -- but with German engineering!)
Eastern European countries flocked to the EU & NATO out of the arms of Russia, and for the most part have benefited. But many Warsaw Pact countries aren't actually in the EU, and others like Poland would be easily able to extract themselves.
One can only pray that this contagion does not kill the rest of us. We are through the Looking Glass Alice, and only guiding principles can point us to the way out. If we follow conservative principles we can find our way back to sanity - if not we shall all go to sleep in the poppy fields and be eaten by vultures.
Socrates was proud that he stood up in all he owned. In the mild Greek climate with fruit on vine and tree, such an ideal can still be approached. The Northman, however, stood up in heavy furs with a heavy axe. Where winter strips branch and vine, ambition separates the living from the dead.
The concept of a "European" fails to recognize this deep divide. Now Greeks stand up clothed in expectations they have no means of realizing. The Germans do them no kindness by continuing to enforce this misperception of how one extracts from nature more than she freely provides.
The real tragedy is that no Greek pol is leading the way out. Yes, they talk about what would happen if they left the euro, probably more to frighten than to inform. So the Greeks will be kept afloat as long as the troika thinks it is necessary to stave off euro collapse. Then there will be default anyway.
I suspect that Greece is the first major failure in a line of many more. It will be interesting to study. Perhaps there will be lessons learned that will allow the rest of the western world to mitigate what looks like an immenent fiscal catastrophe.
NIP - Spot on. The reason that the EU will do everything they can to not let "countries exit the euro zone in an orderly fashion" is that it will be Greece today and Spain, Portugal, Italy, et al tomorrow. Why? Becuase monetary devaluation is the only way for these countries to get out of their current mess without much more significant pain for their citizens. Come to think of it, that's exactly what the Fed is doing in the US!
"While there are ways of letting countries exit the euro zone in an orderly fashion,"
Actually really there isn't. There are no more good options. A Greek exit from the Euro would cause massive problems, Greece staying in will also continue to cause problems.
The solution large losses to both private and public creditors combined with massive reforms in Greece are still a long way off.
Those idiots in Europe are treating the default of Greece the same way our idiots treat education. They think more good money after bad will solve the problem. It doesn't. Sometimes you have to bite the bullet.
First to Humpty, there is a difference between the EU (a trade pack) and the Euro (zone).
I keep wondering why the Greeks don't create a de facto currency (IOUs) to pay bills the way California did. A not perfectly elegant way out but better than what is on the table.
"Greece now stands on the brink of a sovereign default."
What is this, 2008? If it hasn't happened yet, it's not going to happen. Everyone else is taking note. There is no consequence to spending into oblivion -- until it's too late.
Greece could default and still stay in the euro zone. They can't be forced out of the euro. The best thing would be for Greece to admit its insolvent, default, be exited from capital markets, get on a surer-footing, and in time regain admittance to the capital markets, all the way staying in a strong currency union that doesn't let Greece devalue/inflate its way out of its mess again.
Kicking the can down the road w/a drachma isn't a solution.
