No good choices left in Greek crisis

Published in the Australian Financial Review (Sydney), 14 June 2015 (PDF)

euroAll eyes are on Greece again this week. The Greek debt crisis was on the agenda of the G7 meeting in Germany last week, and discussed on the sides of a Europe and Latin America summit in Brussels. The IMF is waiting to see if Athens can repay loans worth €1.6 billion ($2.3 billion) by the end of the month.

Despite all this excitement, Greece is not the most important country in the world. Its economy accounts for 0.15 percent of global population and 0.3 percent of global economic output. These figures are a reminder what a disproportionate amount of time, money and column inches have been devoted in recent years to this tiny country on the outskirts of Europe.

If Greece had been any other country, its sovereign debt crisis would have been over for a long time. Greece would have defaulted to its creditors, reformed its economy and started over. After all, this is how ordinary debt crises normally work.

The problem is Greece was never allowed to have an ordinary debt crisis. From the moment it started, its crisis was as much a euro crisis as it was a Greek crisis. Being part of the eurozone complicated the situation and prolonged Greek suffering, without leading the country any closer to a solution.

The situation is complicated by the fact that any solution depends on Germany. After five years of bailing out other countries, it is fair to say crisis fatigue has set in. As Spiegel magazine reported last week, more than a third of German Chancellor Angela Merkel’s parliamentary party may rebel against a third bailout package for Greece.

When then prime minister George Papandreou admitted in early 2010 that Greece’s public finances were in a more serious state than previously admitted, markets began to panic. Yields on Greek government bonds skyrocketed, and it seemed was only a matter of time until Greece was forced into default. The reason Greece did not default then is the same reason the Greek crisis is still with us today. It was never handled as an economic crisis but always as a political crisis.

Public debt was so high in 2010 that it should have been clear Greece could never repay its creditors. If it had been about helping Greece to recover, it should have been allowed to leave the eurozone and default on its debt back then.

For fear that a Greek default and eurozone exit could spark speculation against other eurozone members, Greece was bailed out and stayed in the eurozone. This meant not only that it could not claw back competitiveness by devaluing its currency. Perversely, it also meant that instead of granting Greece debt relief, it was saddled with even more debt.

Today, the effects of this policy are plain for everyone to see. Greece’s economy has contracted by almost a third since 2008. Its unemployment rate stands at 25 per cent, and its debt to GDP ratio is around 180 per cent. In every respect, Greece’s so-called “bailout” has been a complete and utter disaster.

At the same time, the Greek problem is now more difficult to solve than it was five years ago. That is because other European governments have underwritten so much lending to Greece that should the inevitable default happen, it is their central banks and taxpayers that will be taking a hit. If Greece went bankrupt today, it could cost Germany alone more than €60 billion. No wonder Angela Merkel prefers giving Greece another few billion euros to keep it afloat for the time being.

Even if a Greek default is again averted by giving it extra cash, it will not be the last time that Greece needs a new bailout. It would also set a dangerous precedent for other countries. But not continuing the bailout would cost Greece’s public creditors dearly, plunge Greece even deeper into crisis, and could also spread uncertainty to other parts of the eurozone.

If Europe’s political elites had allowed the Greek crisis to run its course in 2010, Greece would be recovering by now. Instead they have made such a mess of it that this tiny country will continue to haunt international meetings for a long time to come.