Into the Economic Abyss: Foolish Europeans Give Irresponsible Greeks Third Bailout

For the first time in decades, the European Project’s future is in serious doubt.
July 22, 2015 • Commentary
This article appeared on Forbes on July 22, 2015.

Nearly a month ago Greek voters rejected more economic austerity as a condition of another European bailout. “Up yours!,” a landslide majority shouted at Greece’s creditors. But today Athens is implementing an even more severe austerity program. Few expect Greece to pay back the hundreds of billions of dollars it owes. Which means another economic crisis is inevitable, with possible Greek exit (“Grexit”) from the Eurozone. The sacred European Project risks moving in reverse.

Blame for the ongoing crisis is widely shared. Greece has created one of Europe’s most sclerotic economies. Stifling statism enriches the political class, discourages economic innovation, and enshrines class warfare. Joining the Euro changed nothing. Noted the Huffington Post’s Andreas Souvaliotis, Athens “enjoyed the spoils of membership without ever trying to live up to its end of the bargain; it cheated, squandered, abused, begged for more and the cycle continued until the financial crisis suddenly brought the entire country to the brink of bankruptcy.”

The Eurocrats, an elite including politicians, journalists, businessmen, and academics, determined to create a United States of Europe irrespective of the wishes of European peoples. That meant strengthening and centralizing political authority in Brussels. It also meant creating a monetary union which was supposed to promote a common fiscal policy and ultimately a continental nation state.

European leaders welcomed Athens into the Eurozone in 2001 even though everyone knew the Greek authorities were lying about the health of their economy. However, economics was secondary. Which is why German Chancellor Angela Merkel later declared: “If the Euro fails it’s not just the currency that fails, but Europe and the idea of European unification.”

However, equalizing exchange rates cemented Greece’s lack of international competitiveness, precluding Athens from devaluing its currency to lower costs. Enjoying an inflated credit rating, Greece borrowed wildly and spent equally promiscuously on consumption. Observed the Wall Street Journal’s Bret Stephens, Athens “wanted to run a five‐​star welfare state with a two‐​star economy.” The expensive party ended only when investors finally noticed.

Greece could have simply defaulted on its debts. However, French, German, Italian, and other European banks had invested heavily in Greek securities. Paris and Berlin, in particular, wanted to rescue their improvident financial institutions. Moreover, the creditors believed that European integration should only tighten. Although EU treaties prohibited bailouts, explained Christian Rickens of Spiegel online, starting in 2010 Eurozone governments “used tricks to circumvent clauses in European law that prohibited precisely this kind of shared liability within the currency union.”

Thus, most of the Greek debt was shifted onto European taxpayers through two bailouts costing roughly $265 billion. As much as 90 percent of the money ended up outside of Greece, mostly as repayments to foreign banks. Loan conditions were enforced through the infamous “Troika”: European Commission, European Central Bank, International Monetary Fund. The result was a 25 percent drop in GDP, more than 25 percent unemployment rate, more than 50 percent youth unemployment rate, and 80 percent fall in stock market values—all comparable or worse than America’s Great Depression. Even with renewed growth Greece won’t return to its 2007 GDP level until the 2020s.

Still, the Greek economy finally began improving last year. But it was too little, too late, as the leftwing coalition party Syriza won Greece’s January election. The new government simultaneously dismantled old reforms and antagonized European creditors. Economic growth lagged and Greece’s financial woes increased. Impasse resulted at the end of June as the second bailout expired.

Greece’s debt/​GDP ratio is second only to that of Japan—177 percent, up from 117 percent at the start of the crisis. Without a path to rapid economic growth Greece will be unable to pay, even though the maturities are long and the interest rates are low. However, the Greek people continue to prefer the illusion of social solidarity through government redistribution to wealth creation through economic liberalization.

Athens denounced its creditors for insisting on repayment. Prime Minister Alexis Tsipras criticized “ultimatums, blackmail and fearmongering,” and complained that the Eurogroup sought “to bar the right of a sovereign people to exercise their democratic prerogative.” He then held a popular vote on the latest bailout proposal, promising that a “no” vote would strengthen his negotiating position.

But European lenders have a lot of money at stake in Greece. Overall Austria has $10 billion at risk. Belgium’s share is $12 billion, the Dutch could lose $20 billion, and Spain has committed $42 billion. Italy, with its own debt at 130 percent of GDP, is on the hook for about $62 billion. France could lose $70 billion and Germany is in for $92 billion.

Writing off Greek debt would require European governments to confess their financial folly to their taxpayers. Restructuring Greek debt also would set off similar demands from other heavily indebted states. Governments that have made painful reforms, such as Spain, fear encouraging radical opposition parties in upcoming elections. Particularly resentful are Eastern European states, which, though poorer than Greece, successfully implemented even tougher reform programs. A policy toward Athens of “extend and pretend” seemed better to almost everyone than acknowledging reality.

Finally, Eurocrats committed to a consolidated continental government refused to consider a Grexit. European integration is supposed to move only one way. For decades European elites have simply rolled over any opposition, rewriting constitutions and scheduling revotes. The Eurocrats were determined to do so again.

So now what?

After the Syriza government nearly wrecked Greece’s economy with its confrontational tactics, Athens required “debt relief on a scale that would need to go well beyond what has been under consideration to date,” noted the IMF. Tsipras encouraged his people to reject their creditors’ best offer, but almost immediately afterwards announced that he had no choice but to request a third bailout.

However, a majority of the other 18 Eurozone members, led by Germany, appeared ready to consider Grexit instead of offering a new deal. Noted Sarunas Cerniauskas and Pauls Raudseps in the Guardian, “From central European minnows such as Slovakia to Baltic Eurozone republics such as Latvia and Lithuania, hard‐​pressed pensioners and workers earning barely E500 a month are at a loss as to why Greece should qualify for more largesse.” Cyprus, France, and Italy pushed back to keep Athens in the common currency.

After bitter debate the Eurogroup set forth its “minimum requirements to start the negotiations with the Greek authorities.” Euro leaders offered some $96 billion. Although the creditors dropped the toughest condition—a temporary Greek exit from the Euro which could easily become permanent—they insisted that Athens essentially mortgage around $55 billion worth of state assets. Other conditions included hiking taxes, cutting tax breaks, limiting pensions, deregulating labor markets, combatting corruption, improving civil justice, and reducing military outlays.

Alas, even if a new deal is formalized, there is little chance that it will work. The European Commission admitted that success required “a far‐​reaching and credible reform program, very strong ownership of the Greek authorities for such a program.” But neither is, or has ever been, the case.

While past Athens governments reduced easily measured outlays, they failed at more fundamental restructuring. Even under the prior conservative government, noted Dimitri Sotiropoulos of the University of Athens: “a policy to open up ‘closed shop’ professions was a failure”; “public sector reforms for the most part did not take place”; “privatizations did not materialize on a large scale.” Greece had to be forced by its creditors to even create an independent statistical office, which nevertheless came under constant political and legal attack.

In pressing parliament to approve the latest program, Tsipras announced: “The government does not believe in these measures. We will do our best to protect people from measures we do not believe in but are forced to implement.” Moreover, economic liberalization remains wildly unpopular. “Statesmanship doesn’t pay,” argued Peter Tenebrarum.

Understandably, European distrust of Athens is deep. During the recent negotiations one EU diplomat was quoted as saying that “The hawks are very vocal.” German Finance Minister Wolfgang Schaeuble said “We will certainly not be able to rely on promises.” Even French Finance Minister Michel Sapin, representing one of the few governments friendly to Greece, opined: “Confidence has been ruined by every Greek government over many years which have sometimes made promises without making good on them at all.”

Moreover, the IMF, a party to the first two bail‐​outs, proclaimed that the latest agreement is not viable. Total Greek government debts were about $354 billion at the end of last year, second only to Japan, which sports the world’s third largest economy. Under the latest program Greece’s obligations will balloon to around $440 billion dollars, some 200 percent of GDP. By 2022 the IMF predicted a debt/​GDP ratio of 170 percent, only marginally below that of today. The European Commission figured the best case estimate—assuming reforms are fulfilled—will be 150 percent, with something closer to 176 percent more likely. Stated the Fund, Athens’ “new financing needs render the debt dynamics unsustainable.”

However, Merkel insisted that a “classical haircut is out of the question.” Instead, Schaeuble suggested “reprofiling” the debt, that is, further lengthening maturities and reducing interest payments. However, Euro leaders insisted that any relaxation of Greece’s debt burden could only follow full implementation of the reform program. And even “a very substantial re‐​profiling,” noted the European Commission, “would still leave Greece with very high debt‐​to‐​GDP levels for an extended period.”

Thus, the internal contradictions of the crisis remain: Athens wants more money and debt relief with no reform, European institutions desire maximum reform without debt relief in return for more money, and the IMF recommends both maximum reform and substantial debt relief along with more money. If the latest bailout fails to revive the Greek economy—and few expect a growth spurt from austerity without liberalization—Athens will be unable to pay its new debts. Then there will be little support for another bailout. Grexit may become inevitable.

Perhaps even more significant, instead of advancing continental consolidation the common currency has become an obstacle to European political union. Worried Dusan Reljic of the German Institute for International and Security Affairs: “What we are experiencing now is a huge step toward disintegration.” Said Kris Peeters, Belgian Deputy Prime Minister: “For the first time in its history, it’s in danger of becoming a less‐​close union.” Opined Financial Times columnist Wolfgang Muenchau, the European creditors have “destroyed the Eurozone as we know it and demolished the idea of a monetary union as a step towards a democratic political union.”

But this was almost inevitable. Nobel Laureate Milton Friedman presciently warned that the Euro “would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues.” Populist parties are rising across Europe. Some oppose austerity and others criticize bailouts, but all appeal to people who feel ignored and victimized by the Eurocrats and other elites. Opined Gideon Richman of the Financial Times, the failed Euro experiment “is now actively destroying wealth, stability and European solidarity,” with predictable political consequences.

The Greek crisis has been particularly disillusioning for the Left, which assumed the EU would grow into a centralized transfer union. Instead, nations are acting in their own interest and leading continental powers have made austerity official Eurozone policy. Eintan O’Toole complained: “The “EU project was all about the gradual convergence of equal nations into an ‘ever closer union.’ That’s finished now.”

Indeed, the latest plan is dividing long‐​time allies. La Figaroreported on “extremely hard, even extremely violent” discussions among the European governments. Franco‐​German cooperation collapsed and Berlin came under attack from Italy as well. Luxembourg Foreign Minister Jean Asselborn warned that Grexit “would be fatal for Germany’s reputation” and summon “the ghosts from the past,” i.e., World War II.

Germany’s Chancellor Merkel committed to another bailout, but Finance Minister Schaeuble publicly broke with her. He told a reporter: “There are many people, also in the German federal government, that are pretty well convinced that [a Grexit] would be a much better solution for Greece and the Greek people.” Hans Michelbach, head of the Christian Social Union, the sister party of Merkel’s Christian Democratic Union, said “Either Greece declares itself willing for a viable solution or the country must leave the Euro.” A poll found that nine of ten Germans opposed debt relief for Greece and more than half wanted Athens out of the Eurozone.

Syriza could break apart. Tsipras won initial parliamentary approval for the new deal only with opposition support. On a second vote he lost 32 Syriza deputies, more than half of the party executive committee, and three cabinet members. Explained Energy Minister Panagiotis Lafazanis: “the worst, the most humiliating and unbearable [choice] is an agreement that will surrender, loot and subjugate our people and this country.” Former finance minister Varoufakis asked: “How can I possibly vote ‘yes’ to monsters and the new Versailles Treaty?” Tsipras revamped his cabinet, but his hold over the party has loosened and new elections are likely this fall.

The latest Greek crisis, to paraphrase Yogi Berra, was deja vu all over again. Europe’s leaders are congratulating themselves for reaching agreement. However, the third bailout likely will not be the final word. Athens’ travails continue to spread loss and hardship across the continent. Greece is unlikely to modernize its economy and pay its debts. Attempts to remain in the currency union probably will fail.

Equally significant, the move toward continental consolidation almost certainly is dead. Along with it dies any possibility of Europe becoming a Weltmacht capable of competing geopolitically with the U.S. and China. For the first time in decades, the European Project’s future is in serious doubt.

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