About three years ago my pal Mike Brock alerted me to the risk premiums being demanded on Greek sovereign debt. They had gone hyperbolic. Apparently Mike was on to something.
It is looking very much as though Greece will not meet its obligations and if it can’t there is every chance that it can no longer remain in the Eurozone. Default at this point may be the Greeks’ best option if it cannot persuade its creditors to take the proverbial “haircut” on its debt. In fact, it may be the best option even if the creditors accept a haircut.
Leaving aside the leftie posturing, there is a very real question as to why Greece ever joined the Euro. The Euro itself is a rather odd construction which makes not a lot of economic sense. Having a single monetary policy while leaving nations free to set their own fiscal policy might make sense if all of those nations were economically very similar. But even then there would be problems if some of those nations were politically divergent from others. The grand hope of the EU and the Eurozone was that people as diverse as the Germans and the Greeks would somehow all become “Europeans”. That has not happened.
For the EU losing Greece would be about as significant as Canada misplacing Prince Edward Island. Sad, a bit of a blow, over in two weeks. For Greece, losing the EU could well be the best thing which ever happened.
Economic reality can be postponed to a degree but it cannot be ignored. The Greek economy was not paying its way. The Greek government was paying lots in benefits and collecting not so much in taxes. Politically, it was largely impossible to cut the expenditure side of the ledger – a position which Syriza is maintaining in the face of its debt crisis. There were and are perverse political incentives to keep paying money which the government does not have to people who are not working. While that is possible when the people who are not working – the elderly, the ill – are a tiny fraction of the population, it can’t be sustained as the non-working numbers grow.
So long as there was the Euro, the EU and, ultimately, Germany to pay the bills there was very little political will to undertake reform. Austerity was decried. The harder truths avoided. Smart Greeks could see what was coming and have been offshoring their money in buckets for years. Good for them, not so good for Greece.
What comes after default will not be pretty and may very well degenerate into a weird sort of civil war. (Not an uncommon outcome in Greek politics from pretty much WWI on.) The may be suffering on a national scale and the collapse of Greek civil society. Or there may not. In fact, it is equally possible what with a Greek currency priced to reflect Greek productivity, Greece could emerge from a default with a viable, Greek, economy.
At the moment Greece is hobbled by a currency which has very little relation to its actual economy.Exiting the Euro is risky but it is likely a better bet in the middle to long term than continuing to pretend that Greece is somehow Germany with a better climate.