Wednesday, February 17, 2010
A Greek tragedy, Act 1
Chicago Tribune: Europe scrambled last week to save Greece, which will soon default on its national debt unless it gets propped up by other nations. This is about as popular in Europe as an AIG fat cat’s bonus is in the United States. But it’s going to have to be done.
Greece has paid generously for services and public sector wages with borrowed money, and it is about to reach the point where it can’t pay that debt. Sound familiar?
Though Greece is relatively dinky — Illinois has more citizens — its economic woes are roiling financial markets. In part, that’s because Greece is a signal of broader economic woes to come. It isn’t the only member of the 16-country euro zone that may need a rescue. Greece is the “G” in what are called the”PIIGS” of euroland — Portugal, Ireland, Italy and Spain also are on the cusp of debt crises.
People in Europe, particularly the Germans and French, are outraged over European Union promises to help Greece, likely with direct loans or loan guarantees.
No wiggle room
But the nations of Europe know a default on Greece’s debt would destabilize the euro and financial markets throughout Europe, with serious implications for the U.S.
The countries that signed on to the euro more than a decade ago surrendered control of monetary policy to the European Central Bank. But the countries didn’t give up their power to tax, spend and borrow as they pleased. They did promise not to let annual deficits creep higher than 3 percent of GDP, a pledge that has been honored more in the breach than reality. Greece’s annual deficit is 13 percent of GDP, and its accumulated debt is close to a whopping 130 percent of GDP.
The Greek crisis is likely to bind its members more closely to each other — whether or not they like that idea. France and Germany will insist on more control over euroland fiscal policy as the price of rescue. Surrendering the sovereign power to tax, spend and borrow could be next, leading Europeans to finally embrace full political integration. Many people have resisted the notion of a United States of Europe, but they might not be available to avoid it.
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