Greece: Why not let it sink?
May 11th, 2012
09:17 AM ET

Greece: Why not let it sink?

By Tim Lister, CNN

Greece may have given us the word democracy and many of the principles of civil society. But now it is "the sick man of Europe," and the people of other European democracies are asking whether it's worth saving with billions more dollars of their money. Put crudely, their argument is this: So what if Greece slides ignominiously out of the eurozone?

Goodbye Greece ...

In continental terms, Greece is peripheral. It doesn't sit on reservoirs of oil, and it relies on agriculture and tourism as money-earners. It accounts for just 5% of the European Union's economic output. With the Cold War long over, its strategic position on the edge of the Balkans is not as important as it was.

Second, critics question whether Greece has the will or capacity to stay within the eurozone. In last Sunday's elections, the main Greek parties - those that had promised to swallow the medicine doled out by the European Union and International Monetary Fund - were trounced at the polls. Thursday, a third political leader was invited to try to form a government. Greek commentators predict no stable coalition is likely - and new elections probable, just as a further $15 billion of austerity measures are due.

Two weeks ago, the governor of Greece's Central Bank, George Provopoulos, warned that unless the country stayed the course, there could be "a disorderly regression, taking the country back several decades and eventually driving it out of the euro area and the European Union."

A majority of Greek - some 70% - tell pollsters they want the country to remain in the eurozone. But a substantial minority have just voted for parties that oppose what they see as austerity imposed by Berlin. They believe the medicine is actually making the situation worse. This year, the Central Bank forecasts the economy will shrink by 5%, after a 7% contraction last year. That means fewer jobs, less tax revenue and more difficulty meeting debt obligations.

Third, is the endless bailout smart economics? Or does it just perpetuate the crisis, as new debt replaces old? A confidential analysis by the IMF, European Central Bank and European Commission in February projected that Greek debt would still amount to 129% of GDP in 2020 and could be as high as 160%. The analysis, obtained by Reuters in February, estimated Greece would need some $175 billion in financing over the next two years.

Some argue that so long as Greece uses the euro as its currency, it will never become competitive. Research by investment bank Goldman Sachs concluded Greece needed a real depreciation in its exchange rate of a whopping 30% to restore competitiveness. Compare its situation to that of Iceland, which after a financial meltdown in 2008 thanks to its over-stretched banking sector, went cold turkey with a 40% devaluation of its currency and let bank creditors whistle in the wind. Now it's started growing again, albeit modestly.

U.S. economist Kenneth Rogoff has argued that Athens should be granted a sabbatical from the eurozone while remaining in the European Union, allowing it reintroduce the drachma at a deep discount to the euro and making its tourism industry wildly popular.

Hans-Werner Sim, head of German think tank Ifo, agrees. The money being showered on Greece to keep it in the eurozone would be better spent lubricating its departure, he says.

"The drachma will immediately depreciate, and the situation will stabilize very quickly. After a short thunderstorm, the sun will shine again," he told German magazine der Spiegel.

Fourth, beyond the discouraging arithmetic, some argue that the Greek state is too dysfunctional to cope with its massive obligations. Greece has a tax system that barely works, recalcitrant labor unions and extensive graft. The latest corruption league table from Transparency International ranks Greece as 80th – along with El Salvador.

"For decades the political elite, mired in corruption and rent-seeking, has followed the path of wasteful spending and patronage," wrote Kostas Bakoyannis, the mayor of Karpenisi, in the Wall Street Journal last month.

Greece hasn't privatized a single, state-owned industry despite repeated promises to do so. Its social fabric is fraying and it has a growing problem with political violence. Add to that, now, an unstable political order.

And finally, if Greece is unable to get its house in order and uncertainty persists, the dreaded contagion effect will rear its head again. It's a truism that markets hate uncertainty, and for the last year Greece has delivered it in weekly installments.

The never-ending melodrama could worsen the psychological climate for other "olive-belt" members of the eurozone. Negotiations on restructuring Greek sovereign debt have already left international investors wary of buying other south European debt. According to the Financial Times last month, investors have withdrawn $130 billion from Europe's sovereign bond markets over the past two years.

On the other hand ...

The opposing argument is that a "disorderly default" or even a managed exit by Greece would have far-reaching consequences for Europe - none of them good - and misreads the Greek mood.

Pierpaolo Barbieri, Ernest May Fellow at the Harvard Kennedy School's Belfer Center, has written extensively about Europe's financial crisis.

"Greek voters have turned against the old duopoly of PASOK and New Democracy," he says, referring to the dominant parties of the past 30 years.

"They are tired of crisis. That doesn't mean they are against being part of the eurozone. They realize their savings would be wiped out if a devalued drachma took the place of the euro and that Greek banks would collapse. So it's important to separate the weakness of the existing political parties from the issue of the bailouts and the eurozone."

Second, there is no playbook for leaving the single currency, no rules governing expulsion. It was just never envisaged. A new Greek government, by persistently defaulting on debt repayments, might effectively vote itself out of the eurozone, but the process would be messy. Greek companies that take advantage of the single market would be badly affected.

"Any announcement of Greece's departure would wreck havoc in the markets. If Greeks elected someone who wanted to pursue this path, it would be impossible to get back in at a later date," Barbieri told CNN.

In addition, he says, there is no guarantee that excising Greece from the eurozone will relieve pressure on other members. It might simply refocus anxiety on the next most vulnerable state.

"If Greece were to fall out, what would that say to Portugal, Italy, Spain and Ireland? There would be a danger to the whole European construction, including the single market. The Germans often say "If the euro fails then Europe fails" - and project Europe has been at the core of German foreign policy for half a century."

Italy, Spain and Portugal are in the middle of painful restructuring; just this week the Spanish government announced it would have to step in to rescue the country's third largest bank.

The worst-case scenario: that the whole concept of an "ever-closer union" toward which Europe has been striving will unwind, one state at a time.

"Europe will have difficulty forming a federation, if its first action is to jettison countries that are unable to make ends meet," wrote commentator Barbara Spinelli in the Italian newspaper la Repubblica.

Let them eat carrots

Is there a way to muddle through? Maybe. But it will require a tilt from "austerity" toward "growth" to persuade the Greeks that their suffering will not be endless.

The basic choice may remain bailout or bankruptcy, but the bailout can be sweetened, as a spokesman for EU Economics Commissioner Olli Rehn hinted Tuesday.

"We can do lots to assist Greece, and we are doing so. Our member states, our taxpayers in other European member states of the euro area, are providing this solidarity," he said.

Concrete action must follow, says Barbieri.

"Europe needs to show the Greeks that they have reason to hope by staying the course, that it won't just be pain and more pain. There have to be measures to help growth, such as European investment projects in infrastructure and help for small and medium businesses starved for funding, which can be achieved through the European Investment Bank. The ECB should continue to help Greek banks, so as to start lending again."

Next year, Angela Merkel will be seeking a third term as German chancellor. If she gets one, analysts say, she may have greater freedom to tilt toward growth.

"It would be a positive development if Francois Hollande [the newly elected French President] could hasten this development and create 'rewards' for reforming countries, so as to remind European electorates the monetary union is not a 'suicide pact,' says Barbieri.

It may be that even with a rancorous political atmosphere, mass unemployment and street protests, Greece is actually making progress. If (yes, it's a large if) the next round of public spending cuts goes through Greece get close to achieving what's called a primary balance, its revenue will pay for its spending. According to the Central Bank, the economy may finally stop shrinking in 2013.

But 2013 seems a long way off, and these are the first tentative steps toward convalescence. Anyone who has seen the movie "Monty Python and the Holy Grail" will recall what happened to the man who insisted he wasn't dead yet.

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Topics: Europe • Greece • Politics

soundoff (152 Responses)
  1. Willa45

    The biggest problem is that ordinary Greek citizens are experiencing way too much hardship and feel they are being unjustly 'punished' to satisfy a debt that for many Greeks was not of their own making. In the minds of affected Greek citizens, the demands imposed by the EU, not only override Greece's sovereignty but are akin to breaking someone's thumbs for delayed payment. Being evicted from the EU might not be the worst thing that can happen to Greece or to the EU. Give Greece back its sovereignty, bring back the Drachma, and allow Greece to recover on its own.

    May 17, 2012 at 10:28 am | Reply
  2. SheilaKA

    Greece is doomed to failure unless they can figure out how to collect the taxes owed to the government. If they can fix the tax system, they may have a chance.

    May 17, 2012 at 11:13 am | Reply
  3. argentine1

    The Worst & Most Indebted Economies In the Eurozone:
    1. Italy
    2. Greece
    3. Portugal
    4. Spain
    5. Ireland
    6. U.K.

    If this keeps up, all of Europe will be dissolved as a whole

    May 17, 2012 at 12:20 pm | Reply
    • Josie Alabama

      Would not that same statement mean Germany, and France are the most "indebted" When is somebody going to say the classic line; it's like being shackled to a corpse. That one really stirs me into a frenzy.

      May 17, 2012 at 1:26 pm | Reply
      • Rod C. Venger

        Absolutely. The nations propping up the deadbeats are okay only as long as the deadbeats don't go belly up. Each default will take a political and economic bite out of Germany, France and the IMF in general. Germany is taking on debt to bail out the Greeks and others, which works so long as the money flows back. They can't eat an indefinite number of defaults.

        May 17, 2012 at 5:21 pm |
    • deathstalker187

      Um sorry but the UK is not part of the euro zone they were the smart ones and said hell no we want our own money.

      May 18, 2012 at 12:30 pm | Reply
  4. Bosda Di'Chi

    The EU was a poor idea from the start, & I've said so for more than 10 years.

    May 17, 2012 at 1:32 pm | Reply
  5. Robo Carrot

    Currencies come and go. I remember the old days in Europe when every country had it's own currency. Furthermore, you could not take any of that currency out of the country. You had to spend it right there at the border crossing. That was back when passports were stamped at the border too.

    Bretton Woods system lasted from 1944 to 1971 when Richard Nixon converted the dollar over to a fiat currency. Inflation and devaluation is the natural order of things. When interest rates go up, people and governments spend less money.

    May 17, 2012 at 2:05 pm | Reply
  6. David

    Apple... Facebook... anyone want to buy a country?

    May 17, 2012 at 2:54 pm | Reply
    • Rod C. Venger

      Can I conquer France? Pleeeeeassssse?

      May 17, 2012 at 5:17 pm | Reply
  7. Rod C. Venger

    "Second, there is no playbook for leaving the single currency, no rules governing expulsion. It was just never envisaged"

    They're kidding, right? Some of us knew 30 years ago that the very notion of the EU and a single currency had fatal flaws, especially in light of the fact that each country retained it's sovereignty. EU states are nothing like US states yet somehow they envisioned a unified europe made up of sovereign countries. They seemed to have pushed aside the fact that the US has a shared and common history, a starting point, whereas Europe's countries are made up of different peoples, languages, cultures, histories and they've alternately warred on each other and been allies against others. I can't fathom how they could be so blind as to not only prepare for this to happen but not foresee it happening from the beginning. The one bright point in any of this is that Tony Blair wisely prevented the UK from dumping the pound in favor of the Euro. When the rest of Europe sinks into the abyss, the UK will be in a position to stay above the fray and displace Germany, which has gained far too much political and economic power of late.

    May 17, 2012 at 5:16 pm | Reply
  8. Matthew

    Europeans are good for one thing War. They were great conquerors/colonizers. Now without the resources from conquest, they are declining. Greeks will eventually figure out that they can solve their problems by invading Turkey or Albania and getting the money to pay off their debts from them.

    May 17, 2012 at 5:53 pm | Reply
  9. Matthew

    White People should go back culturally and behaviorially to the way they were in the 1500-1800s. White people kicked a** during that period. All the world was under their thumb.

    May 17, 2012 at 6:03 pm | Reply
  10. al

    I think the real fear in the EZ is that Greece will default and not because it will destroy the EZ economies but because it will leave the lenders holding the bag. Greece will not be torn apart if it defaults, what will eventually happen is what happened in Argentina. When Argentina decided to default what took place was several years of depression like economic activity but then growth return to the country. If Greece were to follow Argentina’s footsteps and succeed in turning its economy around the precedent would be set and other countries that are being forced to put their people through rough austerity measures would follow suite. This would be the worse case scenarios for the IMF and the ECB who would be left with nothing. This is the real fear and this is what is driving the major push to give the bailouts and pass austerity measures in these countries.

    May 17, 2012 at 7:58 pm | Reply
  11. c s

    As this article points out that the tax system in Greece is in terrible shape with many not paying any taxes. Governments cannot exist without revenue and this clearly shows it. The Greek government cannot collect taxes owed and this is one of the reasons for their current problems.

    May 17, 2012 at 10:19 pm | Reply
  12. Sid

    stopped reading once i saw that the article quoted a goldman sachs report, really? isn't goldman sachs the same group that was working to mask the Greek debt? Not sure that you should trust a report put out by someone with a vested financial interest in the findings of the report.

    May 17, 2012 at 11:57 pm | Reply
  13. Greeeeeeece

    The EU is collapsing. Globalism sux.

    May 18, 2012 at 12:24 am | Reply
  14. Diplomad

    See http://thediplomad.blogspot.com/2012/05/meltdown-of-greekafornia.html which argues for cutting Greece free from the European currency and for letting California go free from the US monetary union.

    May 18, 2012 at 1:31 am | Reply
  15. Herby Sagues

    Devaluation sounds like an easy response, but it's not. When you devaluate, lots of things happen for which there's no easy answer. Take one example: a foreign investor has money in Euros in a greek bank. After devaluation, do you return their money in Euros? If you say yes, you have to figure out where you get the money to do it, as you can't demand that debtors return what they owe in Euros since their income and the value of their property has been devaluated as well.
    Also, the so called "30% devaluation" does not exist. If you devaluate by 30%, there's immediate inflation of at least 10 to 20%, since lots of resources (e.g. oil) are priced at global prices. So your effective devaluation becomes minimal, and you have to devaluate again and again until things stabilize. The typical result is a 2:1 to 4:1 devaluation. And at that point, your chances of paying off your national debt became zero, so you have to default.
    Not saying a devaluation is not the best (less bad) of the options Greece has, but do not think for a minute that a devaluation is even close to an easy solution. It is a nasty, ugly one, with thousands of people out of a job, massive banking problems, forced breaches of contracts, default, loss of trust and ability to meet commitments and general caos. I've been through that twice. It's not nice at all.

    May 18, 2012 at 2:01 am | Reply
  16. deathstalker187

    The Euro was a bad idea to begin with. What they should have done was say yes the Euro is a new currency of all countries and back by all countries but not the only currency. Each country should have its own currency and also accept the Euro. When each of these countries went to this one currency they gave away power that should have never been given up. England was the only smart country out of the lot and now they have bragging rights.

    May 18, 2012 at 12:35 pm | Reply
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