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By Paolo von Schirach
June 27, 2011
WASHINGTON – The Economist, news magazine has its own recipe for Greece, (If Greece Goes…, June 25 – July 1, 2011). It correctly points out that the EU has been in denial about Greece. Thinking that more liquidity, added to more liquidity already pledged, will do the trick of resurrecting the Greek economy and thus its public finances is wishful thinking. Greece does not have a temporaray liquidity problem. It has a a basic insolvency problem. Notwithstanding the massive rescue package initiated last year, Greece cannot come back. The markets do not believe it. The debt burden is too huge. And politically the Greeks are not on board –this being a real problem, as it will be impossible for the country to emerge from this disaster without the people supporting whatever economic policy agenda is agreed to.
Bankruptcy will not do
However, according to The Economist, an old fashioned bankruptcy, with Greece leaving the Euro and reneging on all its debts, would be a disaster with unfathomable consequences, not just for Greece but also for all those who are exposed to it, starting with many commercial banks in France and Germany that lent heavily to Greece during what appeared to be better times.
Arranged bankruptcy, much better
So, what is the least troubling solution? A piloted bankruptcy. Basically, creditors accept a cut. Debt would be reduced to about 80% of GDP, about half of what it is now. The paper argues that this would be far more acceptable. The losses have already being factored in by many. Those who hold Greek debt can take it. And the real advantage would be to reduce the crushing debt burden for Greece, thus allowing some hope for the future. Coming back from under a debt half the size of this one may be doable.
Restricted sovereignty
Of course, Greece would have to agree to all kinds of restrictions. In other words it would have to accept that it will have to operate under European tutelage and supervision, probably for several years. Europe would have the power to dictate or at least validate Greek budgets, fiscal policies and privatization modalities.
This is rather extreme, of course. This is the kind of therapy that the IMF used to impose on African basket case countries. These were the loathed “conditionalities” to be accepted in order to be bailed out by the Washington based multilateral financial institution. “You want our money? Well, then you do as we say”. Under this scenario, Greece would be the new Burkina Faso or Liberia.
And yet, is there a better scenario? The idea of rolling over existing debt, looks like a softer and perhaps less intrusive approach. But it will not work. And Greece’s exit from the Euro and declaring bankruptcy is too risky. So, a guided bankruptcy, under EU supervision, seems better.
Nothing within the EU contemplates this
Indeed. But it should not escape anybody’s attention that, if the EU went that route, The Europeans would be inaugurating a new era of de facto limited sovereignty for troubled members. Nothing in intra-European agreements provides for these extraordinary interventions and for Brussels running the affairs of a member country. If this is one way of deepening European integration, it is a funny way of achieving it. The construction of a United Europe should be based on political consent freely expressed, because countries want to surrender sovereignty by merging into a federal state. Instead, here we would have drastic surrender of sovereignty not chosen, but mandated because of a financial and economic emergency.
Starting Europe with the Euro was a bad idea
I said before that integrating Europe starting from the currency would be like having started the United States starting with the Federal Reserve. No, America started with a Constitutional that envisaged strong federal powers. The Federal Reserve came much later. It came into existence and started operating after America was born and reasonably grown.
While The Economistmay be right on Greece, the Europeans have had it wrong on how to build Europe –essentially from the beginning. And the Greek mess is at least in part caused by assuming that fiscal policy coordination could happen “just like that”, without any real institutional backbone deriving its legitimacy from a genuine and deeply felt political arrangement. And so, now, if The Economisttherapy is agreed to, the Germans will have to swallow the economic and political consequences of having accepted a lousy partner without any clear political arrangement freely entered into by any of the parties involved.