Published May 24, 2011
In all their piety, the barons of Europe -- German politicians and the European Central Bank -- are pressuring Greece to sell off assets, raise taxes and curb spending to resolve its debt crisis. After all, irresponsible southern EU states are in need of rehabilitation and some lessons in Teutonic thrift.
Sadly, selling assets won’t lower Greece’s debt enough to make it manageable. Further, cutting spending and increasing taxes further will thrust Greece into a deep and prolonged recession and severe deflation. That might raise Greek exports enough to service its euro denominated debt but not without turning much of Greece into a Great Depression era Appalachia.
And, Greece’s problems are hardly all its own doing. The 1992 Maastricht Treaty widened and deepened the EU’s single market, and raised expectations in poorer EU states for retirement, health care and other social benefits on a par with rich states like Germany and France. However, the treaty did not provide Brussels with the taxing powers Washington enjoys to equalize Social Security, Medicare and Medicaid, and other benefits across the 50 states.
With Maastricht, German manufactures and technology became more valuable in a single integrated European market. However, Greece, Portugal and others were not able to use their lower labor costs to capture assembly plants to the degree that the post-World War II American South captured northern textiles and furniture factories, and now attracts automobiles and high-end electronics manufacturing. Germany and other rich states enjoy subtle forms of protection that discourage sufficient outsourcing even to other EU member states, and this frustrates the EU single market promise to more effectively equalize prosperity among the prosperous core and southern Europe.
Germany grew richer, while Portugal, Greece and others fell behind northern Europe. In such circumstances, the currencies of poorer states would be expected to fall in value, lifting exports and providing a new elixir for Mediterranean growth, but the advent of the euro in 1998 put the kibosh on that most vital tool of macroeconomic policy.
Prosperous Germany, unburdened by an obligation to share significant enough tax revenues with poorer EU states, used the wealth it obtained exploiting a single market to provide generous pensions, gold plated employment security and jobless benefits, and the shortest workweek on the planet. Meanwhile, governments in Greece and other poorer EU states struggled to keep up, piled up lots of debt and couldn’t scale back spending too much without risking political upheaval. Their voters don’t understand why the much touted single EU market imposes equal responsibilities without ensuring more equal benefits.
If Greece still had its own currency, it would still have had to cut spending and increase taxes -- but not by nearly as much as richer EU states and the ECB now demand -- because Greece could also devalue its currency against those of richer EU economies to make exports more competitive, accelerate growth, and increase debt servicing capacity.
But like an American homeowner with a mortgage too large relative to his income, Greece is too far in debt for any kind of refinancing that does not cut principal owed to succeed.
Selling off Greece’s prized assets, like the Piraeus Port Authority or the Thessaloniki Water and Sewage Company, will only finance interest payments for a period without addressing Greece’s fundamental insolvency problem.
In the end, the only viable option is to restructure its debt -- ask bondholders to accept a longer maturity and lower interest rates, or a more explicit write down of amounts owed. The ECB has threatened to abandon Greece’s private banks if Athens restructures.
That would force Greece’s banks into failure and surely thrust Greece into a depression. And it begs the question: if the ECB won’t support the only reasonable solution for Greece, why should Greece remain in the euro?
Thanks to German and ECB intransigence on restructuring, Greece has no choice but to require sovereign and private creditors to take haircuts; abandon the euro and reinstate the drachma; and rethink its welfare state.
Like Americans, the Greeks will have to work longer to retire, accept other less generous social benefits, and accept that the European dream of a single market is a very pleasant reality for the Germany and other rich states but a nightmare of constant austerity, or worse, for the poor Mediterranean nations.
In the bargain, Greece can let its currency adjust to a value that fairly values its exports and regain control economy. The alternative is endless EU bailouts -- something the German, Dutch and French voters are doubtful to allow -- loss of Greek sovereignty, and economic collapse.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.