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Greece’s Financial Crisis

Tragedy or farce?

Mar 8, 2010, Vol. 15, No. 24 • By IRWIN M. STELZER
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Here is where history matters. To get the Germans to give up their cherished, stable deutsche mark in favor of the euro, their leaders had to promise that under no circumstances would Germany become the lender of last resort to countries that failed to keep their fiscal houses in order. Indeed, Germany went along with the European “project”—replacement of nation states with a federal Europe—only because it wanted to end fears of a German Europe by creating a European Germany. The “project” from its inception was less about economics than about creating a political union so tight that war became unthinkable. The theory, rather charmingly Marxist in conception, as Gideon Rachman notes in the Financial Times, was that by creating economic institutions—the European Coal and Steel Community, then the Common Market, then the common currency—the founding fathers were ensuring that European political institutions would soon follow, consigning the nation-state to the dustbin of history. In the event, it is not clear that politics follows economics.

At least it doesn’t seem to be working that way so far. German chancellor Angela Merkel has made it clear that she has no intention of having her taxpayers (voters) pay for Greek profligacy. If the Greeks think that she will change her mind, so the joke making the rounds in Europe goes, they have really lost their Marbles. Not that the Greeks are eager to give Germans a say in how they run their country: Having once had experience with that circumstance, they do not want Merkel’s tanks wheeled onto the lawn of their finance ministry. Deputy Prime Minister Theodoros Pangalos says that Greece faces a period of austerity because Germany never paid adequate reparations for its occupation: “They took away the Greek money, and they never gave it back. This is an issue that has to be faced.”

One can’t help feeling at least a bit sorry for Greek prime minister George Papandreou, who inherited the mess he now confronts. Papandreou is an American-born sociologist trained at, among other places, the London School of Economics. He is also the son of a distinguished economist, with two brothers trained in that dismal science, and thus not short of economic advice. What he lacks is control of the voters in a country in which one in three workers is employed by the state, many in no-show jobs, and in which evading taxes is the national pastime—most shops have a two-price system, with hefty discounts for customers willing to do without a sales receipt. 

Papandreou fears that if he accedes to the demands of his fellow eurozone members and cuts spending even more than he plans by laying off large numbers of public sector workers, raises Value Added Taxes from 19 percent to 20 percent or 21 percent, and turns the tax collectors loose (only 70 percent or less of VAT due is actually collected), recent general strikes and protest marches will escalate into destabilizing, window-smashing social unrest. It seems that Greek public service workers are especially offended by the government’s proposal to raise the retirement age from 61 to 63.   

The EU does hold one trump card: Article 126.9 of the 27-nation’s Lisbon Pact allows Brussels bureaucrats to seize control of Greece’s budget. That is not likely to happen, at least overtly. Creeping insertion of monitoring seems more likely. Meanwhile, negotiations continue. The EU is pressing Greece to get its deficit down, the markets are warning that Greek bonds will bear high premiums when the country seeks new financing, and Papandreou is denouncing his potential saviors for interfering in his country’s affairs—a bailout is fine, but attaching strings to incoming checks is not. For good measure he is accusing “certain other forces”—read U.S. hedge funds—of trying to bring down the euro, a cry also heard in Spain, where the intelligence services are investigating collusion between the media and U.S. investors to drive Spain’s economy to ruin.


Which brings us to California. And New York. Among others. We live in an age when private sector deleveraging is running alongside huge increases in public sector debt. Greece is not alone in running double-digit deficits, or pushing its debt-to-GDP ratio to levels that new studies show will stifle future growth. Nor is it alone in keeping huge future liabilities off the national balance sheet—as any analyst of the Obama budget plans will tell you. Of course, the United States is not Greece: We have a reserve currency that retains worldwide acceptability, a central bank that sets interest rates appropriate to our economic circumstances (or tries to), minimal tax evasion, a far smaller (but rapidly growing) public sector, and a set of books that are more credible than those in Athens.

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