Does Greece’s Financial Troubles Mean Death to the Euro?

By James Mazol
Web Editor
February 28, 2010

How would you like to retire early, avoid paying most of your taxes, and still receive free healthcare and education? Pack your bags for…Greece? Until the global recession threatened its fiscal solvency, Greece regularly aspired to such social democratic goals. According to the Economist, the average Greek retires young (the average age is 58 with a full pension), dodges the taxman (95% of tax returns report annual income less than 30,000), and enjoys robust public sector spending (government expenditure accounts for almost 50% of GDP).

Countries experiencing recessionary economic times watch as tax revenues plummet, spending obligations remain constant or increase, and budget deficits expand. In October 2009, Greece’s fiscal stability, however, was further tarnished after Athens doubled this fiscal year’s deficit projection to 13% of GDP. Bond market speculators began a sustained assault on Greek debt, raising the price for Athens to service its obligations. Talk of default mounted as it became apparent that cash-strapped Greece must raise billions of Euros to pay off interest in the next few months – unless its Euro-area partners opt for a bailout.

Do Greece’s tattered finances and likely bailout mean death for the Euro? Some financial commentators believe the 17-member club will falter under the weight of massive debt obligations – not only owed by Greece, but Italy, Portugal, and Spain too. Will fiscally stable Euro members bail them out as well? If so, will the currency’s value drop substantially?

The Daily Telegraph’s Simon Heffer artfully presented the pessimistic logic: “Germany will not bankroll Greece because it understands that the German people will not tolerate their money being wasted on such a depraved policy [bailout]. The euro is utterly compromised.” In other words, the rich and responsible Euro elite (read: Germany and France) will not subsidize the profligate, particularly as they are beginning economic recovery. In turn, debt-ridden countries will refuse accepting conditional bailout money, which gives Paris and Berlin huge influence over their fiscal policies. Thus, debtor and creditor nations will part amicably, with Germany keeping its money and Greece returning to and promptly devaluing the old drachma.

This logic is incorrect – at least, from a debtor nation perspective. Participation in the Euro provides Greece and its ilk cover to pursue badly needed fiscal reform. Playing by the Euro’s rules allows their governments to run stable economies and the opportunity to blame “Brussels” when these policies prove unpopular. The ability to simultaneously draw upon and scapegoat restrained (but rich) Euro-area members is irresistibly attractive.

On February 12th, following a two-day informal summit, leaders from Euro countries announced vague plans for a Greek rescue. Yet, the outline of the emerging plan is hopeful, possibly able to return Greece to solvency without sparking destabilizing social unrest. In return for access to credit (probably low-interest rate Eurobonds), Greece would have to overhaul its accounting and fiscal oversight apparatus. Perennial collusion between politicians and regulators to understate true deficit figures completely undermined confidence in the government’s economic stewardship. Athens would also have to cut its deficit from about 13 to 9 percent of GDP this fiscal year and push that number below 3 percent by 2013. Most important, the government must accept economic policy interference from its creditor countries, including advice from the International Monetary Fund.

Of course, Greece’s public sector unions reacted with their usual combination of outrage and protest. Government plans to increase the full-pension retirement age to 63 and enforce tax evasion laws spurred the strike action.

The fact that these protests quickly petered out should tell us something about the Euro’s attractiveness to its free-spenders. The public cannot really blame Prime Minister George Papandreou’s administration because its hands are tied by the demands of foreign finance ministers. Thus, Papandreou can push through unpopular reforms and direct the public’s ire toward France and German central bankers and faceless “speculators.”

While it shifts blame to Berlin and Paris for enacting austerity measures, Athens will also “benefit tremendously from the euro’s credibility by being able to borrow more cheaply than they would outside the euro area, something not lost on finance ministers.” This gives them political cover and cheap money. If the Euro falls apart, it will certainly not be Greece that wants to be first out.

The photo in this article is being used under licensing by creative commons. The original source can be found here: http://farm2.static.flickr.com/1027/880913951_13b97d1e13_o.jpg

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