The Euro crisis is not one of our usual subjects on this blog – but given that we are generally are dealing with the EU, we should not turn a blind eye to a crisis that, if allowed to continue, could seriously threaten the future of the Union as such.
The current economic crisis, it is true, is a worldwide and multiple crisis, not solely a crisis of the EU monetary union. It has to do with irresponsible borrowing by consumers, irresponsible lending by banks, and irresponsible deficit spending by states. But in Europe, it is further exacerbated by the fact that the single currency was a flawed concept right from the outset: a monetary union that is not accompanied by a common economic and fiscal policy is bound to be dysfunctional. In addition, the EU has insufficient means to ensure compliance with the stability criteria that countries obliged themselves to respect when acceding to the Euro.
To solve the problem that we are facing today, it is insufficient to say that the Euro should never have been introduced, or that Greece should never have been allowed to join the Euro. Both mistakes lie in the past, and the wheel of history cannot be turned back. What we need is a solution for today, not a lecture on what went wrong yesterday.
The problem today is, on the one hand, the Greek government’s stubborn and provocative unwillingness to comply with commitments it has undertaken in return for financial support from the other countries of the Eurogroup: this country simply does not want to play by the rules, and rather than assuming responsibility for its own situation it prefers being subsidized by all other members of the Eurogroup, which includes several countries (such as Estonia, Latvia, Lithuania, or Slovakia) where salaries and living standards are far lower than in Greece. Other countries (like Spain, Portugal, and Ireland) have made painful cuts and are on the way to recovery, but Greece won’t follow their example. No wonder that Europe is getting fed up with Greece’s eternal self-pity.
On the other hand, however, the Greek government is not wrong in saying that Greece can’t possibly be expected to pay back its debt: that debt simply is too big. If all went according to plan (which it doesn’t) Greece would only begin liquidating its debt as from 2020, and then it would still take half a century until that debt is settled. In actual fact, it is illusionary to believe that this is ever going to happen. It might be wiser for their creditors to acknowledge this. No problem can be solved without realism.
In actual fact, there is only one possible solution: Greece must leave the Euro. There is no alternative to this. Currently, the wages in this country are still at least 30% too high in relation to the country’s productivity. But negotiating salary cuts at such scale is a political impossibility. The only viable solution is to re-introduce the drachma and devalue it – this alone would allow Greece to become competitive on the world market.
The problem is that EU law does not provide for a possibility to leave the Euro – it only allows leaving the EU as a whole. However, with some good will on all sides this problem should not be insurmountable.
But there is another problem: re-introducing the drachma would mean that Greece would have to pay its Euro-debt in drachmae, which would (from the Greek perspective) mean that that debt might double or triplicate. This would make the recovery of the debt even more improbable than it already is.
In other words, the exit from the Euro must be accompanied by (another) “hair-cut”.
Creditors should not be squeamish about this. While Greece has been irresponsible in borrowing money, they have been irresponsible in lending it. It is the trademark of a healthy economic and legal system that those behaving irresponsibly must live with the consequences. The true reason for Europe’s woes is that politicians are unwilling to accept this. And this failure is precisely what has prolonged and exacerbated this crisis.
A diagram recently published by the Italian newspaper Il Sole 24 Ore illustrates what has happened:
At the beginning of the Greek crisis, the Greek public debt was owned by (predominantly French and German) banks, not by governments. Now it is owned by governments (in absolute figures, the biggest creditor is Germany, but per capita the risk exposure is at least equally high for other countries), not any more by banks. Thus, the real effect of saving Greece was not to save Greece, but to save the banks in possession of Greek state bonds. This has cost taxpayers around 240 billion Euros, which they will never see again.
Why are the EU’s decision makers so afraid of seeing Greece leave the Euro? Why are they so reluctant to face reality and stop subsidizing Greece? Because a Greek default would reveal to the world (and to European taxpayers) that the policy of (at least) the last five years has been completely and utterly wrong. Who is the politician that wants to go to his electorate and tell it that he has stupidly burned 240 billion Euro? (The creation of the monetary union, which was decided more than 20 years ago, might be easier to acknowledge as a mistake, given that it was decided by a generation of politicians most of whom are either out of office, or dead – however, there are two notable exceptions: Jean-Claude Juncker and Wolfgang Schäuble…)
The Greek neo-Bolsheviks know this. And they will certainly use this knowledge.