Greece At The Rubicon

When the Euro was set up, they knew it was a fraught proposition, binding themselves to each other financially. The Germans in particular, fearful about giving up the strong Deutschemark, insisted on strict penalties for any country whose deficit breached 3% of GDP. Of course it was Germany itself, and France, that soon violated this, but the matter was fudged. Not a good precedent.

Meantime, there were also stringent fiscal criteria for admission to the Euro. So how did Greece get in? It cooked its books, and lied.

Greece’s economy has long been weighed down by clientelistic politics producing an over-bloated state sector, with lots of well-paid unneeded government jobs, fat pensions and benefits, while tax avoidance became endemic, and red tape (giving all those government workers something to do) strangled business. Thus Greece could not pay its bills, borrowing heavily to close the gap. This is what was covered up. But about five years ago the retsina hit the fan when the hole became too deep, requiring a bail-out.

Reasonably enough, the Europeans (mainly Germany) insisted that Greece clean up its act as a condition for the bail-out – the “austerity” we hear so much about. In hindsight, they may have overdone it. You’d want to wean the country away from profligacy, but not crush its economy, because economic growth is the only hope for ever paying Greece’s debts. Greece did accept some reforms, but did suffer a pretty severe economic contraction, with 25% unemployment, which didn’t help matters.

Part of the problem is that lefty Greeks just don’t get it that, to support the lavish government salaries and other spending, you need an economy that actually produces something that earns money. Of course, that’s dirty capitalism. Feh. So Greece’s reforms did little to improve economic productiveness.

And the reforms in question, the so-called “austerity,” merely moved Greece from extreme profligacy to moderate profligacy. This shows just how deep the hole is, and suggests the Europeans probably also erred in failing to bite the bullet of just writing off a major part of Greece’s debt.

Through all this, Greeks have cast the Germans as villains, seeing no reason why they shouldn’t go back to the old ways of living high on the hog on borrowed money they can’t pay back. The Germans see no reason why, having themselves undergone, a decade ago, the same sort of painful reforms now asked of the Greeks, they should have to work to age 65 and pay taxes so the Greeks can retire at 57 with fat pensions and avoid taxes. A classic grasshopper-and-ant story.

Then in January the Greeks elected the Syriza party, a bunch of irresponsible leftists with a platform of rejecting “austerity” and restoring the days of wine and roses. They danced in the streets exulting in this triumph of wishful thinking. The new government, led by Alexis Tspiras, proceeded to make a hash of further bail-out negotiations and to shred any vestige of trust by Europeans. And then, just as it seemed possible that a deal might nevertheless be struck, Tsipras kicked over the table by calling a snap referendum on whether to accept the bail-out terms.

He urged Greeks to vote No, saying they could have their cake and eat it too – twice over – that they could reject Europe’s terms yet stay in the Euro – and, indeed, could reject the deal and see off austerity, returning to their old cushy clientelistic habits. With what money? Who knows.

This insane fantasy Tsipras cast as a matter of national pride – standing up against European (mainly German) blackmail!

Two things happened in the week before the vote. First, Greece defaulted on a scheduled debt payment; a first for a “developed” country. And Greece’s banks all but closed (for lack of money), allowing only small ATM withdrawals, throwing much of the economy and many people’s lives for a loop.

You might think this foretaste of what could lay in store would give the Greeks pause in the referendum vote. You’d be wrong. This vote was a matter of pride, remember. The Greeks are a proud people – proud enough to borrow billions and tell the lenders “Fuck You.” And so they did – a resounding 61% voted No. And again the grasshoppers danced in the streets to celebrate their courage.

What happens now? Tsipras justified the referendum “No” as strengthening his hand to get a better deal from the ants who, of course, lacking backbones, might just cave. But the Europeans had said they’d construe a “No” as a vote to exit the Euro. Greeks have indeed made a courageous bet, and if it comes wrong, those who thought “austerity” was rough ain’t seen nothin’ yet.

It’s not really clear how a country can be kicked out of the Euro. But perhaps it would be as simple as the European Central Bank supplying no fresh Euros; after a time Greece would effectively be forced into a different currency.

The Economist believes Europe should think twice before such a drastic step into uncharted territory. It could pull a thread that unravels the whole fabric. And you wouldn’t want a failed state in the continent, with all the potential tsuris that could entail. Furthermore, Greece could be thrown into the arms of Putin, with whom Tsipras has been playing footsie. But The Economist also thinks that if Greece stays in the Euro, the kinds of crises we’ve seen will keep repeating basically forever.

My view, FWIW, is that Europe should cut off this gangrenous limb once and for all. A Greece-free Euro zone should ultimately be stronger and more stable. And there’s the issue of moral hazard; Greekish behavior should be seen to have consequences, lest others (like Spain) be tempted to follow it.

But Europe should also ready humanitarian aid packages for Greece. We’ll see if the Greeks spit in their faces then.