Greece, and What Comes Next

Greece is a microcosm for most of the developed world. It is mired in debt and at the mercy of forces beyond its financial control. The downward spiral is accelerating. As a condition for granting the May, 2010 rescue package, the IMF imposed severe austerity measures which included reductions in government social spending and a broad array of tax increases. Germany and France, who between them came up with most of the €100 billion euro package, imposed some restrictions of their own. In this regard, they obtained confirmation from the Greek government that Greece would complete the large arms purchases entered into with both countries by the previous government. The intent of the 2010 rescue was to give Greece time to redress its massive budget deficit. The package lasted barely one year. Over that time the budget deficit has gotten far worse as the economy sank further into recession. Greece is now petitioning for another €100 billion euro loan.

The problem of Greece’s public finances will not be cured by taking on additional debt, even though another temporary rescue package is very likely. With 25% of the working population employed by the government, 16% unemployment, and draconian cuts in wages, pensions, and other spending, Greece is on a course to national impoverishment. Greece accounts for only about 2% of euro-zone economic output, too small to threaten euro-zone gross domestic product. It is, however, a tocsin for other euro countries which run high budget deficits without the economic muscle to pay for them. The bitter medicine being imposed on Greece is proof once again that a country cannot shrink itself to prosperity. The end game is still in the future. In the case of Greece a default is a better than even bet if the Greek people revolt against the costs imposed on them as a condition for the loans. Withdrawal from the euro zone and devaluation may be seen as a less painful alternative.

Statesmanship in Europe is clearly lacking, and all countries will be motivated by their own self-interest. The monetary union will survive no matter what happens in Greece, but will require major improvements to fix some real flaws. Some loss of sovereignty will be necessary. Remedies to the current crisis will likely include further reductions in spending and more benevolent terms on temporary loans, including lengthening maturities and reductions of interest rates. The message throughout Europe is that the welfare state paradigm is over, and growth must come from a stronger private sector. The process has already started in the U.S. at the state level.