Greece Once Again Threatens Europe’s Financial Stability
WASHINGTON – Greece is again in the news, and for bad reasons. Early elections (to be held on January 25) had to be called by Prime Minister Antonis Samaras. This is what is prescribed by the Greek Constitution when Parliament fails to elect a new President of the Republic. Early elections have raised the prospect on a new anti-austerity political majority headed by the leftist party Syriza.
Syriza, led by Alexis Tspiras, is ahead in the polls, even though it is not clear how it would fashion a coalition in order to have a majority in Parliament. Still, assuming that Syriza prevails, then it is almost inevitable that Tspiras will reopen the complicated financial arrangements (with spending cuts, huge new credits and debt reduction in the mix) reached with the European Central Bank, the European Union and the International Monetary Fund that have allowed Greece to avoid bankruptcy.
Simply stated, Syriza believes that the draconian spending restriction imposed by this package are too strict. The Greek people are suffering too much. Therefore a new leftist majority would want to reopen the deal, in order to give Greece a bit more breathing room.
Where is the money?
On the face of it, this whole idea is preposterous. Greece got into serious trouble because of its fiscal irresponsibility mixed with thievery and corruption. Until 2009 It kept on borrowing, while willfully falsifying its real deficit and debt numbers. The country has an uncompetitive economy. Its employment numbers were inflated by the number of people in totally unproductive but somewhat remunerative public jobs. Adding more public spending and/or employment without changing the economic fundamentals would amount to a temporary alleviation. It is clear that this “let’s spend some more policy” is no economic growth strategy.
Still, be that as it may, could a winning leftist majority pull this off? Well, it seems that the Greeks have bargaining power. And this power rests on the financial damage that would be caused to the rest of Europe by a Greek default and/or messy exit from the Euro.
If Greece goes…
In other words, here is the threat: “If we go down, we bring you down with us. So, be careful.” Indeed, the consensus in Europe is that a Greek financial debacle would cause intolerable pain in France, Germany and elsewhere. Too many EU financial institutions have invested in Greek deals and Greek debt. The losses would be painful. This being the case, a new anti-austerity Greek government may have enough leverage to get what it wants –a lessening of the austerity constraints– without paying any price.
Well, who knows how things will turn out in the end. But one thing is clear. This is a never-ending bad story. Beyond Greece, the fact is that the Eurozone is inherently weak. If a third tier, semi-bankrupt economy can threaten the stability of the entire currency union, something is wrong.
And what is wrong is that the Euro is a common currency that imposes all sorts of constraints on inherently weak countries that have no basic agreement among them on fiscal and economic strategies aimed at achieving real growth.
A union of the poor
The Euro is a poorly designed monetary alliance that links mediocre and semi-destitute countries. The semi-destitute (Greece, Spain, Italy and Portugal) are supposed to follow a low spending and smaller government diet. But the fact is that beyond lavish public spending that creates fake employment, and therefore fake income, these countries have almost nothing.
No credible growth strategy
There is no credible, self-propelled economic growth strategy in Greece or Italy. It would take a major revolution to radically transform labor markets, to create incentives for new businesses and to concentrate resources in R&D, so that competitive new products could be successfully launched.
None of this is on the horizon. Admittedly, the austerity policies imposed by Europe are no picnic. They mean lower standards of living, without a real prospect of any real improvement. But the leftist populist idea whereby there is, of course, a free lunch is no better.
Who will pay?
Let’s assume that Syriza wins the January 25 elections and Greece wins its political battle with Brussels and Frankfurt. So the new Prime Minister Tspiras will manage to obtain a reduction of the austerity measures previously imposed. Fine. And then what? Who is going to pay for the added cash doled out by the Government to make the people feel better? There is no money. This policy shift could only be financed by issuing more debt. Yes, this means adding new debt to the old. Is this a strategy? Sadly this is the best that one can find.
A strong currency assumes strong countries
Leaving Greece aside, the sad truth is that a currency union by itself cannot magically create wealth. It can be a good instrument to create synergies among economically interdependent countries already tied by a variety of economic and commercial agreements. But the implicit assumption is that these countries are doing well. If these countries are doing poorly, or very poorly, a currency union is no substitute for better economic growth strategies.
Until Europe will remain the prisoner of disastrous statist policies centered on inefficient public sectors, the Europeans will never get out of this mess. The ECB clever manoeuvres are not –and cannot be– a substitute for policies that generate real wealth.