It is hard to see how the Greek crisis can end up as a positive sum game for Greece and the European Union. The Greek electorate will almost certainly not accept the hardship of endless austerity as the price to be paid for the restoration of economic solvency. Nor will taxpayers in Germany, Holland, and other fiscally prudential countries tolerate continuing bailouts. There will be no deus ex machina to resolve this Greek tragedy, which seems almost certain to lead to a debt default and possibly to Greece’s departure from the eurozone.
Like Jean Monnet, Robert Schuman, and the other postwar luminaries who envisioned such shared entities as the European Coal and Steel Community and Euratom as a way to transcend Europe’s destructive political rivalries, the architects of the European Union (EU) and the European Monetary Union (EMU) also sought economic means to achieve the goal of political cooperation. Unlike the European Community that emerged from the chrysalis of postwar economic cooperation, which was essentially a customs union that did not infringe on the prerogatives of nation-states to develop their own fiscal and monetary policies, the EU’s creation of a common currency and the inevitable dilution of sovereignty it implied heralded a much more ambitious undertaking: political union. Adherence to the economic strictures of monetary union, then German Chancellor Helmut Kohl and others believed, would lead to growth-enhancing structural changes and reduce the gap between conservative Northern states and the more fiscally lax South.
Because of cultural and historical differences among EMU members, not everyone has emulated German frugality on fiscal outlays. Nowhere has this been more evident than in Greece, which fudged the numbers to gain access to the Eurozone in 2001. The combination of easy credit and low interest rates in the following decade not only inhibited more prudential policies, it opened the sluices to even greater fiscal incontinence in Greece and in the other beleaguered economies of Portugal and Ireland.
Despite Greece’s profligacy, it is not solely to blame for the fix it is in. Mario Monti, the president of Bocconi University and the former EU Competition Commissioner, contends that the large EU countries abetted Greece’s improvident behavior. As he recently pointed out in the Financial Times, the EU could have mandated its independent statistical office, Eurostat, to review the submissions of candidates for membership such as Greece to ensure that they were not supplying false information in an effort to comply with the convergence criteria laid out in the Maastricht Treaty. But Germany and other guardians of fiscal rectitude failed to exercise proper due diligence, which they believed would have been too intrusive. They reposed their confidence instead in the belief that the anticipated rising tide would lift all boats.
Even now, faced with the almost certain prospect of sovereign debt default in Greece and perhaps Portugal as well, the EU has hardly responded courageously. Conflicting views between the European Central Bank (ECB) and certain EU members, notably Germany, over the participation of private creditors in further bail-outs have wasted precious time. Intent on avoiding a sovereign debt default, which would result in capital losses for European banks holding Greek bonds, the ECB has advocated further lending, if only to allow banks time to build reserves and thus cover the loans that they will eventually be forced to write off. Until recently, however, Chancellor Angela Merkel has refused to extend additional credit unless private lenders also bore some of the cost of bailing out Greece.
If European financial institutions were not still struggling to overcome the effects of the credit bubble and the deep recession it produced, if EU governments were not consequently saddled with contracted fiscal policies, or if Greece were the only country in the eurozone that faced the prospect of default, it might be possible to buy time until Greek economic health could be restored. But the Greek economy is uncompetitive, a condition that is not likely to change any time soon. Greek debt is more than 150 percent of GDP, the rising spread between Greek and German 10-year bonds has greatly increased interest rates, the current-account deficit is widening, and the growth-enhancing effects of privatizing public-owned entities, which the government of George Papandreou has begun, is not likely to show results for some time to come.
One can easily sympathize with the Greek public’s rage over the unremitting austerity program imposed by the EU and the IMF. Even though the Greek Parliament has endorsed the latest austerity measures, there will be more to come; the psychological as well as economic toll on Greek citizens, especially pensioners, will become increasingly unbearable. At the same time, the frustration of taxpayers in Germany and other current-account surplus countries who are being asked to underwrite transfers to those who live beyond their means is also understandable.
Given this predicament, prudence would dictate that Greece use the most recent capital infusion from the ECB and the IMF to prepare for an orderly restructuring of debt, just as Argentina was forced to do in 2001, in which private as well as government creditors will participate. Perpetuating a program of capital infusions and further austerity will not solve the competitive problem the Greek economy faces. Worse, it is likely to lead to a disorderly default that will roil financial markets, intensify North-South tensions in the EU, and threaten the viability of the eurozone. If an orderly debt restructuring does not restore Greece’s competitiveness, however, there may be no other option than to leave the EMU.