The Greek Crisis Drags On – Europe Should Cancel Most Of Athens’ Debt – An Insolvent Country Cannot Pay Back A Crushing Debt And Have A Hope To Grow Again

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By Paolo von Schirach

February 5, 2012

WASHINGTON – What is most amazing about the Greek debt crisis is that more than two years into it, (it all started in the Fall of 2009), the European Union has not managed to take care of it. True enough, the Greeks bear full responsibility for getting themselves into this financial abyss and for being recalcitrant counterparts, largely incapable of understanding that the old ways of not working much, not paying taxes and still expecting public services and a good standard of living are gone. Still, it is inconceivable that the other 26 members of the European Union, a grouping of nations with a combined GDP larger than America’s, have been unable to resolve, once and for all, the troubles, deep as they are, of one of its middling to small members.

How big a hair cut?

The issue at hand today is the inability to impose a dramatic loss to private holders of Greek debt. While everybody agrees that there must be a “hair cut”, the sticky issue is how big a hair cut. And this matter that is both financial and political drags on and on. And it is not that everything else is settled. The Greek economy, while benefiting from a variety of lines of credit, is on respirator, while it keeps shrinking, year after year. To get out of this horrible mess, the Greeks need not just some cash to stay afloat. They need some kind of credible pathway to new economic growth. And it is not clear that one has been delineated. Certainly not by the wobbly coalition supporting the recently installed technocratic government headed by Lucas Papademos, himself an economist and a former Central Banker. And the EU partners are not doing any better. They should recognize that the people of a virtually bankrupt country committed to more and more austerity have neither the resources nor the will to go back to work.

Why so difficult for a 15 trillion EU to deal with tiny Greece?

But let’s look at the actual dimension of the problem by considering the larger context. The EU of which Greece is still a proud member has a combined GDP of about 15 trillion dollars, just about the size of the USA. Sure enough the parallel ends here. The EU is not “A Country”. It is an arrangement among many countries. Their combined wealth, while the largest in the world, cannot be mobilized that easily. Still, in comparison, Greece has a GDP of only 300 billion dollars, smaller than Singapore, a tiny city state. And if we look at the EU leading countries, Germany, The United Kingdom and France have respectively the 6th, 9th and 10th largest GDP in the world. Greece is number 41 in the world rankings.

Is it really possible that the EU as an institution and within it its most formidable members, (the UK is not part of the Eurozone, but surely it must have an interest in its stability), have not yet managed to close a two year old problem affecting a relatively minor EU member? Well, yes, it is possible; because the EU has weak institutions, while its key members are not unanimous on anything.

Greece both insolvent and declining. The GM analogy

In the end the Europeans will have to recognize that Greece is an insolvent country trapped in an uncompetitive economy that simply cannot be re-energized while at the same time servicing a gigantic (even if now diluted) debt. As nobody wants to see a Greek bankruptcy, fearing that a disorderly solution would have unpredictable ripple effects, then what do you do? Well, you force all creditors to take a big hit, I mean a really big hit. Forgive me an analogy that may be questionable, but this is what the US Government did with General Motors. Sure enough, in 2009 Uncle Sam stepped in with big money, but the key point here is that a de facto bankruptcy allowed GM to get out of most of its pre-existing obligations, financial, contractual, with the unions, and so on. And so, with Washington’s critically important help, a leaner and unburdened new GM could come to life. And now it seems that a reborn GM will be quite capable to function without government crutches.

EU weakness worse than the Greek crisis

We need the GM equivalent for Greece. Right now, all creditors and most of all all key EU policy makers have to realize that Greece is both insolvent and declining. If bankruptcy is unacceptable because of its messy consequences, then the only hope is to give Greece a truly fresh start. And this means debt forgiveness, just like we used to do with messed up third world countries. No use demanding money that cannot be produced. The never ending negotiations between Greece and its private creditors unfortunately indicate that we are not yet at the point of a realistic political consensus on any of this.

At some point some deal will be struck, I suppose. But the way the never ending Greek Tragedy has been handled is an indication of Europe’s internal confusion and consequent lack of resolve. And this inherent EU weakness may be even worse than Greece’s problems. Europe revealed itself to be nothing more than a turbo-charged Chamber of Commerce, with no idea of how to deal with crises.

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