A Greek Tragedy


Germany’s decision yesterday to impose tough measures in order to bring the Greek economy into line, was one more statement about the difficulties Europe is finding in cementing its Union.

Since the Greek economy began to tank in October, the other members of the European Union have expressed extreme nervousness about what this might mean for the future of the Euro.  For if the Greeks default on their debt, the Euro’s value will plummet, taking with it the economies of many weaker member states and having a decisive impact on the economies of the stronger nations. For default could have a debilitating effect, sparking sharp swings in the euro and investor panic in other hard-hit nations.

Greece is one sick baby.  The Greek national debt, put at €300 billion ($413.6 billion), is larger than the country’s economy, with some estimates predicting it will reach 120% of gross domestic product by the end of 2010. The country’s deficit — how much more it spends than it takes in — is 12.7 percent which is almost four times what is allowed by the strict Euro-zone rules.

Desperate to stave off economic collapse, the Greeks have looked to their European partners for a plan to emerge from potential   bankruptcy.

Although Greece saw a long economic boom during the 2000s, analysts say successive governments failed to tackle an inefficient public sector in which wages and benefits ballooned. When the Socialist government came to power in October, its leaders discovered that their predecessors had doctored Greek financial data and that the deficit actually was 12.7 percent of the gross domestic product, double earlier figures. The realization sparked downgrades by rating agencies that triggered the sell-off in Greek bonds, as well as a sharp drop in the euro.

Add to this severe institutional problems – such as the fact that a third of the country doesn’t pay tax and a quarter of the economy operates under the table and you have a recipe for economic catastrophe.  Corruption, venality of office, an over loaded and under-worked bureaucracy and the fact that there is no history of accommodation between the political class and labor unions at all, have all added to the sense of hopelessness.

Greece is already in major breach of euro-zone rules on deficit management and with the financial markets betting the country will default on its debts, this reflects badly on the credibility of the euro. There are also fears that financial doubts will infect other nations of lesser economic worth.  These smaller economies  – Portugal,  Italy, Ireland , Greece and Spain (dubbed  somewhat colorfully as the PIIGS)  are coming under increasing scrutiny.  If Europe needs to resort to rescue packages involving bodies such as the International Monetary Fund, it would further damage the euro’s reputation and could lead to its  substantial fall against other key currencies.

The Greeks, laboring under high 6% interest rates for international loans need to meet governmental obligations, have pleaded with their other member states to provide them with cheaper money so that the road ahead is not so difficult.  But Germany, with Europe’s strongest economy, is having none of it.

With so much at stake, why are the Germans being so hard nosed?

Its quite simple really.  It refuses to pay for other members’ irresponsibility.    According to a joint statement on the EU Web site, in the event of a Greek default and failing to access funds in the foreign bond market , a “majority” of the euro zone States would have to contribute an amount based on their Gross Domestic Product (GDP) and population.

This means Germany will be the main contributor, followed by France. Although the announcement did not mention any specific figure, a senior European official quoted by Reuters said that the potential package may be worth around 20 billion euro (US$26.8 billion).

Perhaps that is why Germany’s Chancellor, Angela Merkel, this week made it clear that in the event of a Greek  default, the International Monetary Fund would be required to participate in a Greek bailout.  With an economy almost twice the size of its nearest competitor, Germany has the muscle to force its European partners to squeal “yavol.”

The decision to involve the IMF in Europe’s first real test of its faith in its currency’s sustainability, has got many E.U. enthusiasts gulping with uncertainty.   Germany’s apparent reluctance to play ball, they feel, is an expression of a lack of confidence of the regional economic hegemon in the Euro’s future.  And if it has so little confidence in the Euro, how does it feel then about the European Union itself?

There has always been a problem of maintaining a common currency among a diverse group of countries.  When the Euro was introduced in 1999, many skeptics asked how it would be possible to uphold the currency’s value  and stability without a firm united fiscal policy or overall budgetary framework.    With each of the participating countries  permitted to determine their own economic future, what was to happen when one of the countries defaulted on its debts?

Well that scenario was deferred for nearly a decade as the euro displayed extraordinary strength, buoyed by a robust continent-wide housing boom and  investor  confidence.   When Greece, for example, dumped its own currency, it gained unprecedented footing in financial markets. With Greek debt backed by the powerful euro, Athens raised billions from foreign pension funds and global banks at interest rates nearly as low as those offered to Germany. Flush with easy money, government spending soared and the economy boomed.

But the global recession has pummeled the continent with a force of a tidal wave, revealing, in its wake,  some of the true institutional susceptibilities of the entire European enterprise.

Part of those problems relate to fertility rates and rapidly aging populations.   The inability of many European countries to produce a work force to meet the needs of growing economies is exacerbated by the weight of pensions that the state is required to dole out to its retirees.

No wonder public sector unions  strikes are occurring all over the country.

The government also has drawn criticism from university students who now doubt that there will be enough jobs for them. Angry posters fill the walls of the entry hall at Athens University’s economics department.   Students there are skeptical that the government will be able to jump-start Greece’s economy.

Valia Floridis, 21, for instance, is looking for work abroad. She says many young Greeks feel they have no future here.

“It depends on their dreams. If they just want to have a job and salary to eat and sleep and live without prospects, it’s OK. But if you want more, if you want something great, if you have big dreams.”

To date, the Greek prime minister, Georgios Papandreou, has stated that Greece does not need any immediate financial aid.   But he admits that it does need the confidence of its partners, for without such a display of continental solidarity, it will lose access to the cheaper money it needs to finance its short and long term obligations.

The situation of this Mediterranean country has many declaring it an isolated case of a country gone wrong.   Yet no one should mistake the tragedy playing out in Athens as a peculiarly Greek one. This playbook gives us an alarming view of the true state of Europe’s finances, with smaller countries and their huge debts threatening to drag the large,  richer ones into a whirlpool of financial collapse.

Blame it on the over ambitiousness of the Euro enthusiasts,  but back in 1999 the likely truth is that the continent, without some kind of political union which provided an overall budgetary framework, was not yet ready for a united currency.   As the succeeding Portuguese, Irish Italian and Spanish crises may  begin to make clear,  countries with much to protect may begin to resist the demand to bolster weaker economies in their continental partnership.

In such a case,  sovereignty will almost certainly trump both ideology and sentiment as northern European countries, fearing a spiraling vortex of economic collapses,  slowly begin to reduce their commitment to the union they worked so hard to establish.

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One Response to A Greek Tragedy

  1. […] The Greek bail out plan announced this week, in which the International Monetary Fund will join with many of the larger European countries in supporting the collapsing Greek economy, was also an attempt to stave off a disaster.    The Greeks have for months teetered on the edge of default on their foreign loans, the prospect of which I explored in the my piece A Greek Tragedy. […]

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