The Greek government is poised to push through Parliament an austerity package needed to avert a default on billions of euros in government debt. Success, though, will only postpone an unsavory choice that the euro area’s leaders will face sooner or later: Let Greece go and put both the European experiment and the global economy at risk, or forge a deeper union in the face of opposition from their voters.
The Greek crisis has become a defining moment in a project that traces back to the 1950s, when a small group of politicians started what would eventually be known as the European Union. Their aim was to form such strong political and economic ties that the horrors of World War II could never happen again.
Now that experiment hangs in the balance. Germans are seething over having to help what they view as Greek freeloaders. Greece’s trade unions are striking, and citizens are rioting over measures that will increase taxes, reduce pensions and slash incomes. Markets are gyrating amid fears that the conflict between Europe’s core and periphery will lead to financial disaster.
The wrangling in the Greek parliament over the $112 billion (78 billion euro) austerity package, and European officials’ efforts to bring private creditors into a new bailout, obscures the magnitude of Greece’s problems. The government simply can’t pay its debts, now more than 150 percent of gross domestic product.
Even if Greece gets its bailout and its economy rebounds, the government would have to run a budget surplus, excluding debt-service costs, of 5 percent of GDP for about three decades to bring down debt to the 60 percent maximum allowed by euro-area rules. Achieving such a fiscal feat for even five years is extremely rare for any government, let alone Greece’s.
The Greeks, of course, bear the main responsibility for their predicament. They effectively lied their way into the euro, presenting deficit figures that were wildly understated. The country consumed far more than it earned and borrowed to make up the difference. Tax evasion is a national sport.
Greece’s foibles, though, would not have led to a crisis without the help of Germany and France. They set the precedent when, for three years beginning in 2002, they exceeded the prescribed budget-deficit limits with impunity.
What’s more, France and Germany played the leading role in setting capital rules that encouraged German and French banks to finance Greece’s profligacy, and then required too little equity to absorb the potential losses. Because of lax oversight of derivatives markets, regulators now have little idea where the losses will turn up if Greece reneges on its debts.
There are two ways the responsible parties can rectify their mistakes. One is to recognize that Greece should never have joined the euro. If it can’t or won’t swallow austerity measures, let it leave and default on its debts.
But the risks of allowing Greece to fail are similar to what the U.S. faced with the 2008 Lehman Brothers Holdings Inc. bankruptcy. Uncertainty about losses would very likely undermine confidence in European banks and in the governments that would have to bail them out. If Greece’s failure led to a credit freeze, that would threaten banks with insolvency and cause losses for institutions that hold those banks’ debts, including the money-market mutual funds entrusted with $2.7 trillion in U.S. savings.
It’s easy to picture an outcome in which credit-starved companies started firing workers, economies headed back toward recession and governments’ own parlous finances prevented officials from stepping in to restore confidence. The financial mayhem would put pressure on Portugal and Ireland -- and possibly also Belgium, Italy and Spain -- to follow Greece into default and out of the euro, splitting Europe along economic fault lines.
The alternative path is only slightly less ugly and unfair. It would require the euro area, led by Germany and France, to assume much of Greece’s $495 billion (345 billion euros) in debt indefinitely and be prepared to take on the debts of Portugal and Ireland as well. The Greeks, for their part, would have to suffer deep wage and benefit cuts to restore their country’s competitiveness.
To help make such adjustments bearable, euro-area nations would have to provide money to support social-safety nets, most likely through a unified finance ministry that many voters would consider a loss of sovereignty.
Even if Europe’s leaders managed to overcome the political obstacles, there’s no guarantee that a deeper union would solve the immediate crisis. Taking on the debts of strapped governments would push up borrowing costs for major European economies. That could prove painful for countries with large debt burdens -- particularly Italy, where government debt exceeds 100 percent of GDP.
Risky as it may be, taking responsibility for Greece’s problems is the least bad option for Europe. This is no longer about saving Greece. This is about self-preservation.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.