The crisis with Greece and the Eurozone itself is far from over and it’s implications for the whole world economy are yet to be realized. This article in the Telegraph indicates that it is a shaky situation indeed.
For Venizelos, the challenge will be to moderate the demands that accompany the new money. Greece is in uproar. The streets are ablaze as the people riot in protest at the €28bn package of tax hikes and budget cuts already being demanded by the donors. Social unrest threatened to strip the country of political leadership last week. First, Prime Minister George Papandreou offered to resign to form a party of national unity as ministers defected in protest at the austerity measures. When the opposition said it would only accede on unreasonable terms, Papandreou instead reshuffled his cabinet – pushing out his longstanding ally George Papaconstantinou as finance minister and installing Venizelos, a former rival for the Prime Minister’s post of more socialist leanings.
Meanwhile, the popular opposition, leading in the polls, has refused to support an extra €6bn of austerity measures to bring down the budget deficit. A game of brinkmanship is developing, with Greece demanding easier terms for an even larger IMF and European rescue or threatening to tip the whole euro area into crisis by risking a default.
For Germany, Europe’s powerhouse and the main donor nation, easier terms are simply not acceptable. Chancellor Angela Merkel’s ratings have plummeted in recent weeks as frugal Germans react with anger to the prospect of bailing out the profligate euro periphery yet again — following rescues of Portugal and Ireland. Greece was the author of its own downfall, the thinking goes. Unaffordable promises to state workers and crony capitalism made the people comfortable and rich at the expense of proper fiscal management. It’s come-uppance time.
Struggling to suppress its angry public, Germany has turned on the third player in the Greek drama — the private sector. Wolfgang Schaeuble, the hard-line finance minister, has been urging creditors to agree to swap their Greek bonds for paper with a seven-year maturity. Although packaged as a voluntary “reprofiling”, such a dramatic measure would qualify in the markets as a default. Under Schaeuble’s plan, an estimated €270bn of Greece’s €347bn of sovereign debt would be restructured — meaning bondholders would have to mark down the value of their holdings.
As far as the European Central Bank (ECB) is concerned, the plan would be catastrophic — turning a local Greek disturbance into a continental struggle. Greece’s crisis would spill across its borders into Portugal, Ireland and, worst of all, the far larger economies of Spain and Italy. It would be Europe’s Lehman Brothers moment as the financial system would seize up once again, triggering an even more painful recession as governments have nothing left in their armoury to fight the crisis.
You might be tempted this weekend to say Greece, for understandable reasons. Not only is it facing almost certain default, it has been a constant thorn in the side of the euro – spending too much, saving too little, and displaying the kind of corporate and statistical honesty you could only hope to match by placing Bernie Madoff in charge of FIFA.
But Greece is not the word. Stricken though it is, lancing that particular boil won’t help. Greece’s issues have always been a manifestation of a far deeper problem with the currency, one that policymakers still seem unable to confront. The eurozone has been pulling itself apart for years; removing Greece will not change that.
However there is another eurozone member that sticks out like a sore thumb. It has run its economy just as, if not even more, recklessly than the Mediterranean brothers, has single-handedly destabilised the euro area for the best part of a decade and is one of the biggest road-blocks to its ultimate recovery. That country is Germany.
This might sound counter-intuitive. Germany, after all, has an enormous current account surplus; it honed its productivity and competitiveness over the past decade; where Greece borrowed it saved, where Spain splurged it cut, where Ireland inflated it deflated. But that is precisely the problem. Were Keynes around today he would have identified the issue instantly: in any monetary system, nursing a mammoth current account surplus can be just as destabilising as a deficit.
It’s easy to blame Greece and its incontinent cousins for their over-spending – and certainly Athens is guilty of fiddling its fiscal figures and failing to collect taxes. But its twin deficits are also a consequence of the low interest rates which were largely determined by the way Germany ran its economy.
The euro project was supposed to bring productivity across the Continent to similar levels. You would expect the same bang for your euro whether you were spending it in Athens or Berlin. A single currency area cannot hope to survive unless this law of economic gravity is obeyed –unless what it is really is a transfer union, where the rich constantly subsidise their poorer neighbours with infusions of cash.
There is little prospect of a Greek productivity miracle in time for it to pay back its loans. In fact, the emergency loans being hammered out this weekend will only serve to exert more pressure on Greece to pay back debt rather than investing in its economy. And while the EU/IMF may well be able to afford a Greek bail-out, or for that matter an Irish and Portuguese bail-out, there is no way they can do the same for Spain – even if the German voters allowed it, which looks increasingly unlikely.
Greece would be better out of the eurozone than in – but then so would Portugal, Ireland, Spain and perhaps a few others. They would convert their old debt into the new drachma, escudo, punt etc, which would upset investors, since it amounts to a default. But it would at least free them from the debt deflation they would be consigned to under any euro bail-out. Their currencies will become representative of the uncompetitive economies they really are.
This is the main problem here. With a common currency and no strong central government but a number of strong separate states – there is no real way for any one to make and institute the kinds of decisions and policies that need to be made to rectify the situation or prevent it in the first place. You have a lot of financial institution pulling the strings, all in different directions. Paul Krugman points this out quite well.
The tragedy of the Euromess is that the creation of the euro was supposed to be the finest moment in a grand and noble undertaking: the generations-long effort to bring peace, democracy and shared prosperity to a once and frequently war-torn continent. But the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter — to ignore warnings, which were issued right from the beginning, that Europe lacked the institutions needed to make a common currency workable. Instead, they engaged in magical thinking, acting as if the nobility of their mission transcended such concerns.
This should be a lesson for those who relish a week government that keeps it’s hands off the economy. We are witnessing right now exactly how this will be played out by the fall of the once proud and strong Eurozone. And as the Euro goes so shall we. The next economic crisis will be a dozy.