The Greek Debt Problem Will Not Go Away – Europe Is In A Dilemma, As The Bail Out Cost Is Causing Political Resentment – But No Way To Let Greece Drown

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By Paolo von Schirach

September 8, 2011

WASHINGTON – Greece for Europe is the mid sized problem that will not go away. But this is more than just an annoyingly chronic tooth ache. Greece is now an essentially incurable bleeding ulcer, requiring constant care and at the same time exposing deeps fissures within a European Union and a Eurozone not designed to endure deep, sustained stress. Simply put, both the EU and the Eurozone are predicated on the benign assumption that all members are capable and always willing to meet certain minimum performance standards.

Standards not met

But when they do not –and Greece is the glaring example– there was and still is no proven and legitimate mechanism to force compliance. And it is obvious that compliance is a lot easier when the standards are established among partners who have more or less have similar strengths. The systemic problem plaguing the EU and the Eurozone, as a subgroup of EU members that adopted a common currency, is discrepancies among them that are just too wide.

Greece cannot be fixed

Case in point, fixing troubled Greece in 2010 seemed painful but doable. After all, Greece is a relatively small country with less than 11 million people, home of a middling economy that ranks 39th place in the world, (when GDP is adjusted for purchasing power parity). It was assumed that a few cash transfusions coupled with some reforms and spending cuts would do the job, allowing Greece to catch its breath and get back in the race. But no, this medicine did not work, for Greece was not just in trouble: it was totally broke, corrupt and non competitive an any scale. So the Europeans (with the IMF) went back at it this year, with a bigger plan. And even this one may not work, for Greece is still broke –and now also comatose.

Political fissures

And so now you start seeing the political fissures. On the one hand, many Greeks essentially have not embraced the medicine. They protest and they riot against austerity measures, while they foolishly blame the EU partners for imposing them. Not a good start, and not the best way to show gratitude. On the other hand, some political forces within EU countries are protesting against an open ended bail out not matched by sufficient reassurances on the part of the beneficiaries –the Greeks– that they really intend to use this money as an opportunity to re-do their economy and start over on fresh basis.

The bail out political cost

And so, some Dutch, German and Finn politicians are increasingly vocal against the idea of doling out more money. The German Finance Minister, Wolfgang Schauble, warned the Greeks that they better behave if they want to see the rest of the aid come to them. So a financial rescue deal has morphed into a political problem. Greece is a bankrupt country that essentially lost its sovereignty. But there is no recognized mechanism to deal with this loss of sovereignty. So, the Greek feel outraged, while the Europeans watch with increasing anger.

No way out

Is there a way out of this? Apparently not. Many experts warn that throwing Greece over board is not possible. The economic and financial dynamics within the Eurozone are such that everything is tied to everything else. According to them, you simply cannot evict Greece without causing a financial earthquake whose effects would be felt throughout Europe, possibly bringing down many commercial banks in France, Germany and elsewhere now exposed to Greek debt.

So, here you have a bad dilemma that is becoming political poison. If you keep bailing out a country that is both very weak and recalcitrant, this may go on forever. If you do not, Greece’s downfall is likely to bring down half of Europe.

Of course, all this would go away if the Greeks could see the light and really start working to rebuild their country. But, given their psychological and cultural make up, this may not be possible, at least not within an acceptable time frame.

The rest of Europe does not shine

And so expect Greece to continue being a chronic illness affecting Europe. In the meantime, other pieces of Europe, (Italy, Spain), while not in free fall, are under severe stress because of weak growth, high cost of entitlement programs and unfavorable demographics indicating increased cost to pay for retirement and medical programs in the years ahead. Which is to say that, unless something major will change, a Greece-like future looks the likely end game for many countries that at the moment, while struggling, are still afloat.

As I said, Europe was supposed to be the home of relatively rich countries with relatively solid economies and public finances. Now it is a mixed bag. Germany, the Netherlands, Finland and Austria are doing fine; but they are many measures ahead of Portugal, Italy or Spain. Not to mention Romania or Bulgaria.

Deeper union is not possible

And for those who suggest a cure centered on deeper union among the members, including co-ordinated fiscal policies and the issuing of Eurobonds available to all but essentially guaranteed by the strongest members (read Germany) , I suggest they stop dreaming. A deeper European Union would be predicated by a shared sense of European identity. On a good day the Europeans are willing to share the advantages of borderless commerce and finance. But that is about as far as their sense of belonging goes.

At the moment, there is not even one single major national political leader within any EU member state strongly embracing a a political unification project. If anything, fringe and not so fringe political forces are protesting against the costs of the association as it currently is.

Europe will move on slowly and with increasing difficulty

Europe will continue to be mostly “a super charged chamber of commerce” without a political soul. And the EU is likely to become progressively weaker in the years ahead. Current trends indicate more fiscal pressure on already strapped governments to pay for welfare programs likely to become more and more expensive, (too many old people, not enough young workers to support them). And Europe, with exceptions, is not a hub of innovation and growth of dynamic new sectors. Even if at some point the Greek crisis disappears, increased entitlement costs, a shrinking revenue base and mediocre growth sadly indicate decline.


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