Euro crisis: Muddling through

In December 1893, the Greek prime minister of the day stood up in parliament and announced: “Regretfully, we are bankrupt.” Nobody was greatly surprised, because the country had already defaulted on its foreign debt three previous times during the 19th century. It defaulted once more in 1932, and the smart money is betting that it will do so again in 2012.
Since Greece uses the euro, the common currency shared by 17 members of the European Union, this is not just a matter of local concern. Many fear that a Greek default could take the euro itself down with it, so there have been frantic EU attempts to cobble together some financial aid package that could keep Greece solvent.
The latest package was enormous: 130 billion euros in direct aid, and a 50 percent write-off of Greece’s huge debt to various European banks. In return, Greece must impose an even tougher austerity program on its citizens to bring its deficit under control. But Greek citizens are already fed up with austerity, so every day brings a new surprise.
On Tuesday, Nov. 1, Prime Minister George Papandreou agreed to the European Union’s rescue package, and everybody heaved a sigh of relief. But on Wednesday he astonished everybody by promising to hold a referendum on the financial package in February: three more months of uncertainty, with a high probability that Greek voters would reject the deal in the end.
The markets erupted in panic, and the EU leaders exploded in fury. On Thursday, they told Papandreou that he couldn’t just hold a referendum about the rescue package, as if the Greeks could renegotiate the deal if they didn’t like it. The referendum must simply ask Greek voters if they wanted to keep the euro as their currency or not. There would be no more money from the EU until they said yes, and none at all if they said no.
So late on Thursday night Papandreou canceled the referendum. On Friday he barely survived a confidence vote in parliament by promising to allow the creation of a broad coalition government. But on Saturday Antonis Samaras, the leader of the main opposition party, said he would not join a “government of national unity” and demanded a snap election instead.
On Sunday, however, Samaras agreed to join an interim government that would pass the promised austerity measures and then hold elections in February – on condition that Papandreou not be prime minister again. The roller-coaster ride continues.
Greeks practically invented drama and they do it very well, but Greece is a small country and foreigners don’t really care about either its economy or its politics. The markets are panicking because this crisis isn’t really about Greece at all. It’s about the future of the euro, which was built on a very shaky foundation from the start.
It was primarily a political project, intended to lock the EU members into perpetual union by the device of a common currency – but there was no public support in any EU country for the surrender of national sovereignty that creating powerful shared financial institutions would require. Nobody wanted a European Central Bank that could give orders to their own government on issues like budget deficits and inflation rates.
The founders of the euro compounded their error by not restricting membership to a northern European core of high-productivity economies. It was about unity, so Mediterranean countries like Greece, with dramatically lower productivity, were encouraged to join as well.
Greece, with access to practically unlimited credit because its currency was the “sound” euro, ran up enormous foreign debts: the government’s salary bill doubled in a decade. It couldn’t go on indefinitely – and so it didn’t.
When the crisis struck last year, it became obvious that the Greek government could never pay its debts, no matter how savagely it cut its spending. If it defaulted, however, the big European banks that lent so much money to Greece would be gravely damaged. Some might collapse, as might even the euro itself.
So the EU is shoveling enormous amounts of money into Greece to forestall a default, while forcing European banks to take a “haircut” of 50 percent on their Greek loans. Even with all that, however, Greece is still drowning in debt, and the EU is no closer to creating a financial authority with the power to protect the euro. It can’t, because there is just no political support for a genuinely federal Europe with harmonized economies.
When will Greece finally default and get it over with? Here’s a clue. Euro deposits in Greek banks fell by 14 percent last year, as depositors moved their money abroad to protect it from being converted into “new drachmas” at a huge discount when Greece crashes out of the euro. In just the past month, euro deposits fell by a further 6 percent. It may not be long now.