A Modern Greek Tragedy

Greece makes up about two percent of the European Union's economic activity. A rough comparison may be the greater Miami area within the United States. Municipal mismanagement in Miami, of course, could not in one's wildest imaginings bring down the dollar. So how is it possible that the Greek debt crisis might wreck the Euro? This is something of a rhetorical question since financial experts have long known the answer: internal Eurozone balance of payments adjustments aren't possible without either fiscal redistribution among Eurozone members or national wage derogation to boost competitiveness. Without adjustments, sovereign default not only becomes possible, but contagious. Absent fiscal redistribution — an option seemingly foreclosed by European leaders — the question financial experts can't answer, however, is how far a Eurozone member's wage levels can fall before the country experiences a political explosion. Perversely, led by Germany, the Europeans seem determined to find out.

Who is really at fault? The conventional answer is, the Greeks: they borrowed too much, they spent beyond their means, and now they must pay the money back. On the other hand, the situation is roughly analogous to an unqualified home buyer getting a cut rate mortgage with balloon payments that they could never hope to make. Shouldn't the lender bear some responsibility?

Though the Europeans claim not to have known until 2004, three years after Greece joined the Eurozone, that Greece had cooked its books to meet Eurozone entry requirements, surely the Europeans were not unaware that Greek notions of accounting paperwork were, shall we say, elastic. Moreover, the European industrial powerhouses had much to gain. With Greece able to sell Euro denominated bonds at low interest rates Greece was able to buy, for example, French Fremm frigates, Super Puma helicopters, and Rafale fighter aircraft, and German S-214 submarines, Leopard tanks, and Siemens rolling stock. The profits were real, and immediate, the risks of a sovereign default theoretical, somewhere over the horizon. Whether Greece really needed these and other major purchases was, to the vendors, immaterial. France and Germany happily would have sold their hardware to Miami, if they could. Not everything that Greece bought with borrowed money was a waste, of course, but that's not the point. Greece and the Eurozone authorities had fibbed to each other in a calculated way, with eyes wide open, so it's not at all unreasonable to suppose both are at fault.

Arguably, indeed, the fault accrues much more to Eurozone authorities than to Greece because, politically, the Europeans have long dodged the critical fact that their limited currency union is unworkable. In particular, Europe has dodged the German question: the largest economy in the Eurozone cannot maintain an export driven economy with unending balance of payments surpluses without causing extreme harm to weaker Eurozone members. From that perspective Greece is little more than a convenient scapegoat for failed European leadership.

The Europeans are moving from delusion to delusion. The buzz now is that it won't matter if Greece returns to the drachma. Other Eurozone members, Germany especially, are tired of the Greeks being Greek. They don't want to make available any additional, large bailouts. And only after Greece accepts the most severe fiscal punishment -- having already seen its GDP shrink by 12% since 2008 -- thus symbolically submitting to a moral code that glorifies plunder, will previously promised rescue funds become available (and even then the rescue funds are to be divvied up firstly among lenders, leaving the Greek government on a shoestring). So say Europe's elites.

The reality, however, is, if and when Greece leaves the Eurozone the exact same balance of payments crisis will recur immediately with regard to the next weakest member and/or the one most vulnerable to derivative trading in sovereign debt. That could be Portugal, or even Italy. The limited structure of the Euro makes such crises and the threat of defaults unavoidable in the long run. We are now in the long run.

The Europeans may well congratulate themselves that they have called the Greek bluff. Instead, the Greeks should call the European bluff, forcing European leaders to either rework the Eurozone into a real fiscal union with transfers from wealthier to poorer members (including a European Central Bank willing and able to back up Euro denominated bonds that are under attack), or else give the project up entirely. In short, the Greeks should say "HELL NO!" to further fiscal austerity.