Will the Euro Survive the Greek Crisis?
From the desk of Paul Belien on Thu, 2010-01-28 12:38
One decade later, the euro is in serious trouble. The problems result
from the recent economic crisis which have badly affected the economy of
Greece, one of the countries of the eurozone. Analysts doubt whether the
government in Athens is able or willing to address Greece’s financial problems.
If not, the other 15 nations using the euro will suffer the consequences, which
is something they are not likely to accept.
Thomas Mayer, the chief economist of Deutsche Bank, warned last week:
“The situation is more serious than it has ever been since the introduction of
the euro. […] If the Greece situation is handled badly, the Eurozone could
break down, or face major inflation.”
The problems of the euro affect the entire world. The EU currency was
not introduced because of economic considerations, but because the European
Union is pretending to be a genuine state and states are expected to have
single national currencies. Hoping to become a powerful political force in its
own right, the EU adopted the euro as the common currency of some 327 million
Europeans, so that the currency’s economic power would prefigure the political
power to be.
With Greece facing bankruptcy, the fears about Greece’s financial
situation has led to a drop in value for the euro. Last week, the finance
ministers of Germany and the Netherlands – the two eurozone countries which in
pre-euro days had the strongest currencies in the EU: the German mark and the
Dutch guilder – announced that they will not help Greece solve its problems.
Polls indicate that 70% of the Germans oppose using their taxes to bail out
other countries.
Moreover, the German economy has also been badly affected by the crisis.
Last year, Germany’s GDP fell by 5%, the biggest drop since the war, with a
drop of 15% in exports and 20% in sales of German manufacturers. The German
people are not prepared to lift countries such as Greece, Romania, Spain,
Portugal and Ireland out of the recession at its own expense.
There is also a lot of anger towards the Greeks in the other EU
countries: for some years Greece seems to have covered up its bad economic
performance by officially presenting better economic figures than was the case.
The promise of the Greek government to reduce Greece’s budget deficit from
12.7% of GDP in 2009 to 2.8% in 2012, is being met with scepticism. Many doubt
whether the government in Athens will be strong enough to resist the domestic
pressure from the powerful trade unions against the radical deficit-cutting
efforts which are needed, while others doubt that the Greeks will refrain from
manipulating the economic data again.
Unwillingness to help the Greeks is huge within a eurozone currently
facing an unemployment rate of 10% of the workforce, the highest figure since
the single currency was introduced eleven years ago. Under EU rules, however,
all the 27 member states of the EU, not just the 16 member states of the
eurozone, are obliged to help the Greeks if the EU decides to bail them out.
Article 122 of the EU Treaty, which went into force last December, states: “Where
a member state is in difficulties or is seriously threatened with severe
difficulties caused by natural disasters or exceptional occurrences beyond its
control, the council of ministers, on a proposal from the European Commission,
may grant, under certain conditions, Union financial assistance.”
This decision is taken on a majority vote. Consequently Britain, which
always refused to join the eurozone, might be forced to help save the euro. The
British press has already reported that if an EU rescue fund for the Greeks
matches the Greek budget deficit, and if the EU decides that member states have
to contribute in accordance with their own share of the total EU economy,
Britain might be forced to pay a £7 billion bill to bail out Greece –
British Eurosceptics fear that if Greece, which represents 3% of EU GDP,
is bailed out, other eurozone countries facing financial difficulties (Spain,
Portugal, Italy) might claim the same treatment. This, they say, would saddle
Britain with a bill of £50 billion to save a currency in which the Brits have
never believed.
Even though European public opinion is opposed to a bailout plan for the
Greeks, Irwin Stelzer wrote in The Wall Street Journal recently that he
expects European politicians to present just such a plan. “There is so much
political capital invested in the euro by the political class,” he wrote. “that
even the stern and parsimonious [German Chancellor] Angela Merkel will in the
end contribute to a bailout fund if necessary.”
However, there also are indications to the contrary. Greek politicians
might feel that the only way to avoid civil unrest in Greece may be to drop the
euro and re-establish their own national currency, the Greek drachme. This will
allow the Greek government to devalue the currency in order to stimulate
exports and economic growth – a political-monetary tool which Athens lacks if
it remains in the eurozone. It seems that some people at the European Central
Bank (ECB), which controls the euro, are in favor of such a move.
On Jan. 17, Ambrose Evans-Pritchard wrote in the London Daily
Telegraph that at the ECB headquarters in Frankfurt the legal ground is being
prepared for a euro break-up. A major problem, however, appears to be that once
a country has accepted the euro it cannot get rid of it unless it leaves the EU
altogether. “This is a warning shot for Greece, Portugal, Ireland and Spain. If
they fail to marshal public support for draconian austerity, they risk being
cast into Icelandic oblivion.” Apart from Britain and Denmark, two countries
which obtained opt-outs in the EU treaties, all EU member states are obliged to
join the eurozone or peg their currencies to it. Former IMF analyst Desmond
Lachman is quoted in CityAM warning: “There is every prospect that within two to
three years...Greece’s European membership will end with a bang.”
Evans-Pritchard
reports, however, that the dominant view in financial circles in the City of London
seems to be that “if a rescue [a bailout of Greece] turns out to be necessary,
a rescue will be mounted.” This is a bet, says Evans-Pritchard, that Berlin
will do “what it did for East Germany: subsidise forever.
It is a judgment on whether EMU is the binding coin of sacred solidarity or
just a fixed exchange rate system like others before it. Politics will decide.”
Which brings us back to Milton Friedman. When politicians decide to rule economic and monetary issues, the results are usually catastrophic.
Beginner's mistake
Submitted by Blueglasnost (not verified) on Fri, 2010-01-29 20:23.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7095818/Funds-flee-Greece-as-Germany-warns-of-fatal-eurozone-crisis.html
While I agree we should firmly object to any bail-out to Greece (or any other country), had I been an official in Brussels' pay, I would not have been too outspoken about the whole thing, the actual EU officials did, and it all happened: frenzy on bond markets, as Greek debt is considered riskier, the yield on Greek bonds has to increase so that the risk is offset. The Greeks have to pay 7.15 % interest rate on their debt as of today, at the current pace, the roll-over effect all have been anticipating will not take long before it becomes a fait accompli. EU officials are incompetents (nothing new here). Greece seems in a very dire situation indeed.
European taxparer will save the day
Submitted by Monarchist on Thu, 2010-01-28 22:09.
They will give cash to Greece for sure, socialist political project is more important than economic science. I don't see how the EU would force Greece to seriously reduce spendings, this is not philosophy popular in Brussels. Brussels is all about spendings. Only right wing dictator could radically change Greek attitude but then the EU would stop trade with such undemocratic (non-socialist) state.
Blueprint # 2
Submitted by marcfrans on Thu, 2010-01-28 21:05.
@ Blueglasnost
You make interesting observations. However, why should possible future Greek bankruptcy "spur European leaders to re-think their monetary policies"?
If and when the Greek government defaults on its debt, it will only make it harder for them to borrow in the future, which will force more discipline. This is no reason for European monetary authorities to get involved. Of course, it may induce the Greeks to leave the monetary union, and this wil be unwelcome to the European political authorities. The latter will have to choose between grandiose dreams and a future of continuous blackmail.
Similarly, the US government should resist 'bailing out' (much bigger) California.
@marfrans
Submitted by mpresley on Thu, 2010-01-28 23:13.
Similarly, the US government should resist 'bailing out' (much bigger) California.
Yes, but you are thinking like an economist, and not a politician. If California defaults they (i.e., most citizens of the state for they are mostly liberal) would not mind being "taken over" by the federal government. And a "bail out" would allow the federal government more control over what was once a sovereign state: something the current administration would not mind, at all. Whether there is political will in the other states to oppose a "bail out" is an important question. I suspect such a move would essentially ruin any prospects for the current administration to be re-elected. But stranger things have happened.
@marcfrans
Submitted by Blueglasnost (not verified) on Fri, 2010-01-29 16:06.
I meant "re-think their monetary policies" in that a possible defaulting of Greece on her debt could prompt other European leaders to withdraw from the eurozone in order to be able to devalue if they restore their own national currencies, that would be a welcome change (from both an economic and political point of view), although it can be debated whether the state should be entrusted with such policies. Hayek's writings on central banking are highly interesting on this topic. As far as I am concerned, I think Greece stands on the brink of bankruptcy, and sharp perusal of national assets and liabilities shows she could default very soon indeed. I definitely agree on California, the "Golden State" should not be bailed out, cuts and austerity as well as a more thrifty behaviour (and not taxpayers as we have seen bail-outs only serve to hand out bonuses to those who do not deserve them, i.e.: JP Morgan) ought to restore some measure of economic equilibrium. Let 'em fail and teach others a lesson everyone should know by now (that you cannot spend more than your income in the long run, it is not economics but common sense).
An interesting blueprint
Submitted by Blueglasnost (not verified) on Thu, 2010-01-28 20:08.
It will be interesting to see what happens in Greece, the situation might provide us with a blueprint for years to come as many other countries are faced with similar dire situations. Greece's debt is skyrocketing, and is over 100 % of GDP (Italy's is as well). As Mr Belien pointed out, the government seems unwilling to do anything or about, any move would be highly unpopular and would likely meet with fierce (left-wing) opposition. Cuts on a tremendous scale are badly needed, I would stake on inaction as the surest course, the government simply has not got the guts to remedy their plight. Milton Friedman was right all along.
If Greece is expelled from the eurozone, whether it be of its own volition or through coercion, others might follow. Spain is faced with a situation so lamentable as to test any reasonable mind. They have been relying on heavy EU subsidies for years, and they could not prevent that situation still. The likelihood of Greece defaulting on her debt is high, very high indeed. I doubt the Germans, or the French, for that matter would consent to bailing out such a failed state, leeching off revenues from the EU as a farmer would milk a cow. The eurozone will be shown for what it has always been: one of this century's biggest swindles; merging so different countries into a single-currency area (explain how you would reconcile Germany's world-leading exports with Spain's fragile economy relying on housing?).
Greece has many options:
(a) devalue their way out of recession by boosting exports and tourism.
(b) massive quantitative easing to wipe out the debt through inflation.
(c) savage budget cuts.
(d) raising taxes.
Options (a) and (b) are impossible, for the euro is controlled by the Frankfurt-based ECB, which also controls the amount of liquidity in circulation, option (b) would be highly harmful to the wider economy as it could lead to hyperinflation, an unsteady economy (due to prices changing too rapidly for anyone correctly to adjust) and damage other economies as well. Option (c) is unlikely due to governmental reluctance and pressure from hare-brained lefties. Option (d) is also unlikely, and would also bring about negative consequences, not least a slowing activity due to higher taxes and a decrease in incentives, taxes could be raised only marginally, and that would not suffice, anyway, nor would it be desirable as it would be as if we doled out more dope to an addicted person (the Leviathan, if you get my drift).
So Greece will descend into bankruptcy within one or two decades. It will prove many economists wrong, and it that crisis bears good odds to spur European leaders to re-think their monetary policies, perhaps by splitting up the eurozone. Only future will tell.
Query
Submitted by KO on Thu, 2010-01-28 20:07.
A girl dressed as a boy or vice-versa?
The Belgian Microcosm
Submitted by Kapitein Andre on Thu, 2010-01-28 19:18.
As Belgium is a the model for European political integration, so too is it for European economic policy, common currency included. The top performing economies of the EU are handcuffed to the losers, whose only concern is prolonging the arrangement. It is an unfortunate consequence of the postwar era that northern work ethic is in the employ of southern avarice. Of course, it goes without saying that any institution bankrolled by Germany and controlled by France is a travesty.