As Goes Greece

ATHENS -- Europe is right on the edge of a needless calamity. One can view the European debacle through three lenses -- the weakness of European governmental institutions in a crisis; the excessive role of financial speculation in turning a moderate problem into a system-threatening disaster; and the purely self-interested actions of Europe's dominant financial power, Germany.

Far too much commentary has used a fourth lens: the alleged misbehavior of the Greeks, which is far from a good reason to destroy the European economy.

Take each of these in turn. Unlike a sovereign nation, Europe cannot act decisively in a crisis, because 27 separate national leaders need to sign off on major decisions.

The European Central Bank (ECB), uniquely in the history of money creation, is a central bank that issues currency but without the backing of an actual nation-state.

By contrast, when the Federal Reserve found itself peering into an economic abyss, the Fed created liquidity and bought securities as necessary, both from the U.S. Treasury and from sketchy private institutions. Markets continued accepting dollars and U.S. government bonds, knowing that the full faith and credit of the United States was behind them.

But the Euro is not backed by the full faith and credit of an actual state. Only about 1 percent of the European Union's gross domestic product flows through EU institutions. The EU cannot call on the tax revenues of its member nations. The ECB is not permitted to directly purchase government bonds, except by stealth.

Every decision to provide relief to struggling member states requires multi-party negotiation, while the crisis deepens. And in the face of disagreement, the default position is to do nothing or to let speculators rule. It would not be an exaggeration to call the EU a failed state, except that it never quite rose to the status of a state.

But dysfunctional EU institutions are only part of the story. Looking back to the beginnings of the sovereign debt crisis in late 2009, when speculators began making bets against Greek government bonds, it is clear that European national leaders and the ECB completely mishandled the challenge because of their conservative, free-market ideology.

The ECB and national central banks might have intervened decisively on the side of Greek government bonds, and caused the speculators to take a financial bath. Europe might have given Greece a relatively modest amount of budgetary aid. Both actions would have nipped the crisis in the bud.

Instead, the European powers allowed speculators to rule. And in exchange for relief that proved far too modest, they demanded two rounds of budget austerity. The government of George Papandreou managed to cut the deficit by five percentage points, at the behest of the ECB and the EU. The target had been 5.5 points. Papandreou was judged to have failed. In a second round of austerity measures demanded by the European powers last September, pensions were slashed, more layoffs were ordered, taxes were raised and further budget cuts were ordered.

As any economics student could have predicted, the result of these cuts was a deeper recession and a worsening debt ratio. As an indication of the sheer incompetence and perversity of the IMF and ECB team, one senior Greek official told me that these officials suddenly demanded that that the privatization program be increased from 15 billion Euros to 50 billion Euros, not because it made economic sense or that there were buyers for that scale of Greek government assets, but because the deficit reduction targets had a 50 billion Euro hole that needed to be filled.

The third problem is the high-handedness of German Chancellor Angela Merkel.

Germany is the one nation that might provide the leadership to avoid a catastrophe for the entire European project. When it was a matter of rescuing other Germans, Berlin managed to come up with two trillion Euros to assimilate the former East Germany into the Federal Republic. You think the East Germans kept accurate books? But Germany shows no such compassion or enlightened self-interest for the Greeks.

Instead, Mrs. Merkel's government has been the prime source of the austerity demands. Even the IMF, not famous for leniency, considers the austerity program excessive. Yet even now, with a backlash against austerity sweeping the rest of the continent and the crisis threatening several other nations and the Euro itself, Germany remains unrelenting.

In retrospect, the EU's crisis management, led by Germany, has been a failure in every respect. The first assumption was that austerity would reassure markets. Instead austerity has pushed Greece deeper into depression, whetted the appetites of speculators, scared away private investment capital, and led to a run on Greek banks.

The second assumption was that the crisis could be contained to Greece. If Greece failed to deliver on the austerity demands, Greece could somehow be tossed out of the Euro and the rest of the Eurozone would be healthier for it. That also proved to be fantasy. Failure to help Greece revealed the vulnerability of the system. The same speculative forces that took down Greece are now menacing the larger economies of Spain and Italy. The entire Eurozone banking system is now at serious risk.

The ever-helpful speculators are pummeling the Euro. The Times recently carried a story that markets, always ready to shoot the wounded, are pulling financial assets out of Greece.

And if European leaders and institutions could not muster the political will and the financial resources to save little Greece, how will they save Spain and Italy?

Still, isn't all this, in some respects, Greece's own fault? It's true that when the Papandreou government took power in 2009, it found that Greece's budget deficit and debt ratio were larger than previously reported. However, Papandreou agreed to honest reporting, deficit reduction and also took steps to reform Greece's notoriously corrupt tax collection agency.

But these reforms could not be accomplished overnight, and a deep recession compounded by austerity demands only made them harder to accomplish. As unemployment has topped 20 percent and tax rates have been raised to punitive levels in a deep recession, more transactions are being done in cash. What would you expect?

If the EU were serious about helping Greece to reform, it would have combined technical assistance and debt relief conditioned on a reform program with a reasonable time period, rather than adopting a purely punitive approach.

Now, the fire has spread to larger countries. And the same frail EU institutions and smug national attitudes that failed to contain the Greek crisis are up against far more daunting challenges.

Historians will look back on the spring of 2012 as moment when Europe's institutions and leaders either failed to contain a deepening crisis -- or as a time when leadership grasped the common stakes and rose to the occasion. You have to be quite the optimist to imagine the more hopeful outcome.

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos.

He is just completing a new book titled, "Debtors Prison: the Politics of Austerity versus Possibility."