When the Twin Towers turned into dust, we were all, as a matter of solidarity, Americans. With the Greek fiscal state tumbling, it seems that we are all becoming Greek this time round. There's always a good cause to be called upon. "You can't let down a fellow European people whose ancestors have invented democracy", a typical answer goes when you ask an official why Athens should be bailed out with German, French and Italian taxpayers' money. And there are, of course, economic reasons too: If Greece goes bust, European banks would have to write-off billions of Euros on Greek government bonds which weigh heavily on their balance sheets. The Euro's stability, it is being said, will come under serious pressure if we don't help Greece address their gigantic debt.
Point taken. In reality, however, Greece should never have been admitted to the Euro club. Belonging to the Eurozone means that countries should be forced to do away with their traditional spending habits. Has Greece, under the burning Mediterranean heat, ever felt comfortable conforming to European financial standards? Apparently not. And most of those in charge in Brussels knew that right from the start. Inviting Greece to join the EU was, in the first place, an act of political correctness, and not of rational economic thinking. What was offered to Spain and Portugal could not be denied to Greece.
Only a few years and a global financial crisis later, the disaster has arrived. The Bundestag and the respective parliamentary bodies in France, Italy and so forth, are preparing to pass emergency bills entitling their governments to contribute to the approximately 30 billion Euro that Greek Premier George Papandreou has asked for in a bizarre television appearance. Just to illustrate the dimension, the 8,4 bn Euros which Berlin will hand-out as a credit to Athens, come fairly close to the sum that the German Federal state annually spends on research and education. Worse than that, the upcoming bail-out will only buy a few months of relief for the Greek finance minister. According to last week's Economist, the Greek government's demand for foreign help may well rise up to 70, if not 80 billion Euros within the next two or three years, and Germany will have to stomach about a quarter of this sum.
How should policymakers react?
Policy makers have already agreed to help Greece with the sums mentioned above. An efficient control regime, forcing Greece to implement a set of tough reforms is indispensable. If German money goes to Athens then at least we need to make sure that it will be spent in an intelligent, sustainable way. A high EU official should be installed in Athens as a kind of state commissioner with the power to veto national Government spending plans that don't comply with EU and IMF standards. Greece should enjoy a set of austere rules, similar to those having been imposed by the IMF on Argentina or Turkey when they were in deep financial trouble.
Another policy option, leaving political correctness aside, would be to allow Greece to leave the Eurozone at least for some time. The advantages are plain: Greece could return to the Drachme, its old national currency, which could then devaluate against the Euro. A lighter Drachme will stimulate Greek exports and thus generate new revenues desperately needed to rebalance trade deficits and repay debts. National pride need not suffer from a currency change as long as it helps Greece to regain competitiveness and fiscal health.
Addressing the option of giving Greece a break from the Euro is not an insult or arrogance, but an act of political honesty. Will EU and IMF officials have the courage to point at this exit? In any event, should Greece leave the Eurozone for a time, the Acropolis will not collapse.
Hans Bellstedt is founder and Managing Partner of hbpa, a Public Affairs consultancy in Berlin/Germany.
Related Articles:
- Morris Goldstein: How to Better Prepare for the Next Financial Crisis
- Garry Schinasi: Designing Financial Sustainability
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April 26, 2010
Greg Randolph Lawson, Wikistrat, Platinum Contributor (469)
Obviously, it is premature to begin drafting "EU post-mortems" at this stage of the game, but it does seem rather evident that coordinated currency policy was not enough without also mandating changes to spending habits as this author makes clear. For the EU to be effective, it will need to coordinate even more than it already does, however, this may not be (and likely is not for the forseeable future) politically feasible. If Germany catches a case of "bailout fatigue" then we could see dramatic changes to the future of the EU.
This would not be a positive thing for the U.S. It is in the U.S.'s interest to open up new markets for exports, of which greater European access could be of immense benefit. Another author here at the Atlantic Community suggested a "trans-Atlantic" free trade zone. This is an idea with merit. However, it won't be able to gain any momentum absent the ability to enforce some sense of fiscal discipline among ALL EU members, and, for that matter, probably the U.S. in the very near term.
"The Greek Crisis" could be an opportunity, it could also be an opportunity lost if the status quo is not fundamentally shaken and modified.