As Margaret Thatcher’s trade minister in the 1980s, Norman Tebbit devoted much of his time to dealing with the European Community – the precursor to the European Union. Routinely, at meetings in Brussels, he would nudge his German counterpart and whisper, “Here come the Greeks looking for another handout”.
There will no doubt be similarly derisive comments uttered when EU financial officials meet in Brussels on Thursday to negotiate a second bailout deal for debt-laden Greece.
The genesis of Greece’s crisis has a long history. But the bottom line is that Greece is a member of the EU for purely political, not economic, reasons (so are Ireland, Spain and Portugal, for that matter, but that’s another story).
Greece’s accession to the union in 1981 was mired in Cold War and NATO politics. When Athens applied for membership in 1976, the European Commission was cautiously optimistic, but recommended a long gestation period to prepare Greece for European membership. But Paris and Bonn waved aside the Commission’s objections and fast-tracked Greece’s membership.
Fast forward two decades to 1999, when 11 EU countries jettisoned their national currencies and adopted the euro. Britain, Denmark and Sweden caused controversy by opting out of the eurozone. Greece, on the other hand, was auspicious due to its absence.
Almost 20 years as a net beneficiary of the EU’s general budget, and countless agricultural, regional and fiscal transfers had failed to transform the Greek economy or eliminate the drachma as the speculator’s currency of choice. Between 1990 and 2001 (when Greece finally adopted the euro), the drachma declined more than 50% against the US dollar.
The euro has done little better, depreciating 30% against the US dollar in 1999 to 2001. This did wonders for EU exports, but did little to alleviate dollar-denominated debt. The game changer was the 9/11 terrorist attacks and the subsequent wars in Afghanistan and Iraq, which reversed the trend and cause the euro to appreciate rapidly against the greenback.
Meanwhile, back in Athens, the Greek finance ministry, which had turned in a virtuoso performance fudging the figures to meet the EU’s stringent criteria for monetary union, switched its not-inconsiderable talents to understating the extent of Greece’s accelerating debt spiral. Which is when the IMF and EU stepped in back in 2010.
Now, let’s remember, the EU-IMF bailout is not for free – it’s a loan, and loans have strings attached. The problem is essentially political: the IMF wants more private sector involvement in eurobond purchases, but the EU doesn’t want its private banks to take on a significantly greater exposure to risk because national governments will be compelled to rescue domestic banks if they incur substantial losses.
Conversely, if the IMF extends additional loans to Greece, this transfers the majority of risk away from individual governments to the fund.
One idea floated recently is a partial debt buy-back scheme: greece could purchase its bonds back with financing from the European Financial Stability Facility (EFSF) and then reissue debt at a lower rate of interest upon maturity. The EFSF, created in 2010 as a consequence of the eurozone debt crisis, is effectively a ‘mini IMF’ reserve fund designed to deal with contingencies such as current account crises. An EFSF-assisted buy-back of Greek bonds could save Athens more than €20 billion.
Greece won’t default
Greece makes up a mere 2% of the EU’s US$16 trillion GDP. Its 350 billion euro debt is steep, but not insurmountable. These are, of course, gross liabilities – like a long-term mortgage, principal and interest payments need to be met regularly. The EU-IMF bailout consists of releasing funds progressively so Greece can meet its international debt obligations.
The Papandreou government has made the right decisions. It has introduced a wide-ranging austerity package, raised taxes, cut wages and started privatising state-owned enterprises. But as a consequence, Greece’s economic recovery will be protracted and painful.
Greek banks will need to merge with larger global partners, and Greece’s government enterprises will need to be thoroughly internationalised. European Central Bank board members and senior IMF officials are already canvassing these options publicly.
As in South Korea in 1997-98, Athens will need to engage in some fire-sale foreign direct investment. Indonesia faced similar problems in following the 1997 Asian financial crisis, enduring a painful IMF structural adjustment program. Now, Indonesia is the world’s third-fastest growing economy.
True, Greece isn’t Indonesia. It doesn’t live in the most dynamic economic region in the world. But it is a member of the world’s largest single market, and its partners – Germany and France – are determined not to let the decades-in-the-making eurozone collapse.
Most of Greece’s debt is owed to French and German banks. At worst, Greece will have a “selective default”, which means not all debts are serviced. Inevitably, this will result in rollovers and restructuring.
Greece will not default because neither Berlin nor Paris has an interest in letting this happen. The real question is how French and German banks get their money back. Inevitably, there will be debt restructuring and the banks will be forced to write off some of their loans. The chief political hurdle for German Chancellor Angela Merkel and French President Nicolas Sarkozy is how to pay for Greece’s burgeoning debts. If history is any guide, the Germans and the French will plunder the ESFS and ECB – that is, EU taxpayers’ funds – to do it.
A withering euro?
Analysts who should know better have been spreading far, uncertainty and dread about the EU and predicting the collapse of the eurozone. They are wrong on three counts.
First, disestablishing even a part of the eurozone, such cutting Greece loose and letting Athens switch back to the drachma, would require exceedingly complex legislation. Successive EU treaties have embedded the eurozone to such an extent that a member country cannot simply up and leave. Seasoned observers of EU affairs know how lengthy and protracted negotiations can be even with uncontroversial legislation.
Second, the euro is stable. Certainly, it is off its 2008 peak, but it’s still at over US$1.40, as the greenback remains persistently weak. T
Third, both Athens and Brussels know that a return to the drachma would simply plunge Greece deeper into disaster. As Greek deputy prime minister Theodoros Pangalos remarked in June, resuscitating the drachma would display “immense stupidity’.
The euro currency didn’t create this crisis – Greece’s maladministration, financial laxity and fiscal indiscipline are creatures entirely of its own creation. The imprudence of French and German lenders is merely a symptom, not a cause, of Greece’s malaise.
When Greek officials and statisticians are economical with the truth, or baldly lie to the EU’s statistical agency, it’s worse than a crime it’s a mistake. Or, to put it succinctly, it’s financial fraud on an international scale.
Make no mistake: the Greek debt crisis is serious and EU taxpayers will be counting the costs for years to come. But Athens will pay a heavy price as well, not least in terms of its policy and fiscal autonomy. "The sovereignty of Greece will be massively limited”, Jean-Claude Juncker, the eurogroup chief, warned last week. High time too, Norman Tebbit would surely agree.