A mass outbreak of syphilis, the radical economist and member of parliament Costas Lapavitsas told an interviewer, is about the only thing the European political establishment did not threaten Greece’s voters with before the country’s early-July referendum.
European Union officials had delivered their umpteenth plan for Greece to continue making payments on its unpayable debt, which now runs into the hundreds of billions. To their horror, Greek prime minister Alexis Tsipras, head of a coalition government led by the neo-Communist Syriza party, put the question to the Greek people. Despite a heavily funded campaign in favor of the debt plan, voters rejected it by 61 percent to 39. As we went to press, Greece was meeting with EU officials to work out whether it will be possible for the country to remain in the euro, the currency that 19 of 28 EU countries share. Christian Noyer of France’s central bank has warned that without a deal Greece could face “riots and chaos.” The European financial press, overwhelmingly sympathetic to the project of binding Europe’s countries ever more closely into the EU, says Greece is facing its last chance.
That is only half the story. This may also be the EU’s last chance. In 2010, its two dozen countries discovered that Greece, one of the weakest economies among them, had accumulated debts equal to its annual output. Europe’s economists and journalists had a field day exposing Greek cronyism and featherbedding. Experts from the so-called Troika (the European Central Bank, the European Commission, and the International Monetary Fund) crafted a Memorandum of Understanding to get matters under control. Their program of tax hikes, budget cuts, and regulatory reforms has been a catastrophe, turning a heavily indebted economy into a heavily indebted and idle economy. For five years, Greece has run as tight a fiscal ship as any European country, yet its debt-to-GDP ratio has nearly doubled, to 178 percent. A third of the loans at the country’s four largest banks are in arrears. In June, Greece became the richest country to default on a payment to the IMF. Certainly there has been corruption. Greece is a country of 11 million with 2.65 million retirees. But, as it was in the Asian currency crises of the late 1990s, corruption has turned out to be a red herring. The larger problem is the misdesign of the euro.
Lending to Stavros
Greece’s euro trouble arose in the wake of the U.S. subprime crisis—and largely because it struck investors as analogous. In both cases a credit system was distorted by an ulterior motive. Depending on whether you like the motive, you could call it idealism or social engineering. In the United States in the 1990s, we were told that the difference in rates of loan approval between neighborhoods was due largely to racism—what the Clinton administration called “redlining.” Once you got over your bigotry, it was as safe to lend to people in the slums as to people at the country club. At about the same time, apostles of the EU convinced Germans (who borrowed at 5 percent) that a currency it shared with Greeks (who borrowed at 18 percent) could be as strong as the deutsche mark they had spent half a century firming up. Once you got over your bigotry, it was as safe to lend to Stavros as to Stefan.
For a while it appeared so. On both continents, lenders took the rhetoric as a sign that the government would make them whole if loans went bad. In America, Fannie Mae and other government-protected lenders could offer loans at a lower rate than nongovernment ones. In Europe, Greek, Irish, Italian, and Portuguese interest rates converged with the German ones. Naturally, borrowers in those countries took advantage of the credit. It is easy to forget that, 20 years ago, consumers did not expect to be preyed upon by financial institutions, as they do now. It had been generations since the last wave of bank runs. To Greeks, those unbelievably cheap loans in Germany’s currency appeared risk-free.
That did not make Greece Germany. Globalization brings prosperity because it brings specialization. Germany specialized in making Mercedes and designing precision machinery. Greece specialized in growing olives and changing tourists’ beds. Southern European countries began running large current-account deficits, which were covered by money borrowed from the north, and in 2010, the system blew up.