European Doubts Growing over Greece Debt Strategy

The Troika’s Policies Have Failed – Published on Spiegel Online International, by SPIEGEL Staff*, February 13, 2012. (Translated from the German by Ella Ornstein and Josh Ward).

… It was a clear message at the beginning of a week in which those seeking to save the euro once again lost fundamental control over their drama. Europe’s leaders had been hoping to finally present to their skeptical citizens a convincing and viable plan for rehabilitating Greece and fortifying the will to preserve the currency union in its current form at any price.

Growing Doubt:  

Instead, we are left with the outlines of a program that not even its designers believe in anymore. Finance ministries in Europe are growing increasingly skeptical about Greece’s ability to reform, despite the passage on Sunday evening of a vast new austerity package in Athens. Efforts to get private creditors to participate in debt relief for the country have likewise been slow to make progress. And there is growing doubt among politicians in Berlin about the current rescue strategy — as there is among the parties in Athens. Late last week, the populist LAOS party, the smallest of the three Greek parties in the current ruling coalition, announced it would no longer back the bailout deal and related austerity measures.

Europe is now paying the price for the inability of its leaders — together with the International Monetary Fund (IMF) and its managing director Christine Lagarde — have still not been able to agree on effective therapy for improving Greece’s economic health. They share the belief that, given the unforeseeable consequences, a Greek exit from the euro zone should be avoided at all costs. But it remains unclear how the highly indebted country can be nursed back to health within the currency union … //

… Mildest Possible Horror Scenario:

The costs of Greek bankruptcy, in other words, would be immense. Still, the calls to finally put an end to the Greek tragedy are growing ever louder. Head of the Ifo Institute Hans-Werner Sinn, for instance, believes the country’s bankruptcy would be the “mildest possible horror scenario” for all concerned.

But what happens if Greece then leaves the euro zone? In the interest of economic recovery, drawing a clear and final line under the entire euro adventure would be the logical next step. If the Greek government were to reintroduce the drachma, greatly devalued, it would make the country’s goods and services cheaper. The tourism industry, for example, would then have a considerable advantage over competitors such as Spain. “This is the most well-proven and feasible way to overcome crises such as the one in Greece,” American economist Kenneth Rogoff explained in a lecture at Berlin’s American Academy last week.

But though that move would help Greece, it would have unpredictable consequences for the rest of the euro zone. “No one can predict how contagious such a step would be,” says Oxford economist Clemens Fuest. EU politicians would be quick to assert that Greece is a special case, but whether EU citizens and international investors would believe those assurances is doubtful. They’ve seen promises broken too often in the course of the euro crisis.

If concerns escalated that Greece would become just the first of many countries to leave the monetary union, it could trigger a dangerous chain reaction. Banks, insurance companies and funds would try to divest their government bonds from crisis-ridden countries as quickly as possible. Meanwhile, residents from Lisbon to Madrid to Rome might start raiding their bank accounts and moving the cash to northern Europe. The gradual capital flight seen in recent months would become a true bank run, which could in turn bring the monetary union to the point of explosion.

European leaders find themselves in a nearly irresolvable dilemma. If they go on as they have been, the country won’t emerge from the crisis. If they force Athens out of the euro zone, they endanger the entire monetary union. That leaves just one viable – but expensive – strategy: Allow Greece to go bankrupt, but within the euro zone. This would make it possible to reduce the country’s mountain of debt to a manageable level, providing the necessary leeway for a new start both economically and politically, through tough structural reforms and a growth strategy for industry and services.

This approach would provide the plan B politicians in both Brussels and Berlin have long been searching for. It’s not yet clear when they will gather the courage to take this inevitable step, but those involved are already contemplating how best to justify, both internally and externally, the departure from the current course of action. “If Greece fails,” Finance Minister Schäuble said during the CDU parliamentary group’s meeting on Friday, “it can’t be because of Germany.” (full long 3 pages text).



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