Greece Derails: Is Europe Far Behind?

Already facing serious difficulties – both internal and with regard to its EU partners (see our longer essay in Saturday’s WSJ) – Greece’s predicament just became substantially worse.

Speaking on national television this evening, the Greek Prime Minister – George Papandreou – lashed out at the European Union (presumably meaning mostly Germany) for creating a “psychology of looming collapse which could be self-fulfilling.” He also implied that Greece was being treated, in some senses, like a “lab animal.”

Without doubt, EU engagement with Greece over the past week or three has not be well-managed – and the pseudo-announcement of support after the summit on Thursday was a complete amateur hour.

But Greece has real problems that need to be confronted and it will go much easier for everyone if there is external assistance. You cannot overspend in the Greek fashion without eventually facing a reckoning.

The Greek government is implicitly suggesting collapse – with the possibility of contagion to Portugal and Spain (and thence to the banking system of Latin America, etc). But this is a very dangerous game. Greece is not Goldman Sachs – it cannot credibly threaten to bring down the world’s entire financial system.

Less well-run countries default on their debts with some regularity. To be sure, it is awkward for a eurozone member to be forced into the arms of the IMF – but several European Union members are there already (e.g., Latvia, Romania.) Korea had to borrow from the Fund in 1997, despite having recently become a member of the OECD – which stamp previously was considered to connote respectability and stability.

Greece is well down the path to becoming regarded more like Argentina – a country that struggles over many decades (and whose leaders frequently rail against the world) and for which episodes of reasonable prosperity and new economic models are punctuated by gut-wrenching crises, most of which do not shake the world.

Will the EU save Greece? Much will depend on how bad the situation could become in other “related” (in the eyes of the financial markets) places.

But destabilizing actions or inflammatory statements by Greece make an orderly rescue less likely and put another major international economic crisis firmly on the table.