Does anyone truly care about Greece anymore? The ongoing discussions about a potential ‘Grexit’ have become tiresome and repetitive over the years.
Greece’s relationship with Europe is undoubtedly strained. The country is burdened with debt far beyond its capacity to repay. Yet, the European Union remains steadfast in preventing a default. As a result, the issue continues to linger, much like an unwanted guest. Why not simply allow Greece to default?
With Greece’s economy constituting a mere 2 percent of the eurozone’s overall GDP, its exit would not significantly impact the European Union. In fact, its importance to the EU economy is comparable to a gnat on an elephant’s back.
However, the Greek dilemma unveils a fundamental flaw in the concept of shared currencies among diverse nations. The notion of uniting different cultures under a single currency may not be as promising as once believed. Certain countries present higher credit risks, warranting a greater premium on their debt. Conversely, more fiscally responsible nations should benefit from lower credit costs.
Ignoring this natural market dynamic disrupts economic harmony, leading to chaos. Greece availed itself of artificially low-interest credit and spent it freely. When the European Union intervened to prevent a default, Greece again indulged in cheap credit, perpetuating the cycle.
Don’t Step Out of Line
We should recognize Greece for its unwitting role in illustrating the downsides of shared currencies. Instead of fostering stability and unity, these bloc currencies have often led to greater instability and discord.
One can only hope that North American leaders will think twice before attempting to abolish the dollar, loonie, and peso in favor of a unified currency, the amero, uniting the United States, Canada, and Mexico. It’s uncertain whether policymakers will glean wisdom from Greece’s predicament, or if they may merely replicate Europe’s past errors.
Meanwhile, anxiety and blame are rampant. Renowned economist Paul Krugman posed the question, “Can anything pull Europe back from the brink?” in a recent piece aptly titled Killing the European Project.
Visibly, European Central Bank president Mario Draghi is attempting to restore some semblance of sanity, while French president Francois Hollande finally seems to push back against the rigid economic policies imposed by Germany. However, irreparable damage may have already been done. Trust in Germany’s intentions has eroded considerably.
Krugman warns that in essence, the economics have taken a backseat. The recent events have illuminated a stark reality: being part of the eurozone means that creditors have the power to dismantle a nation’s economy should it diverge from expectations. This holds true irrespective of the underlying economic principles of austerity. As Krugman emphasizes, imposing severe austerity measures without debt relief is a futile endeavor, no matter how willingly a nation resigns itself to suffering.
Playing the Hand Dealt
Germany has grown weary of Greece’s reckless spending habits. Rightfully so. Continuously financing bailouts while Greece fails to meet reform targets must have been exhausting and eventually becomes intolerable, a threshold that has long since passed.
At Economic Prism, we refrain from casting blame. Germany is not the villain, and Greece is not merely an irresponsible spendthrift. They are both maneuvering within the constraints of the hand they have been dealt.
The existing political arrangements have put them in untenable positions, often at odds with each other. Radical policies sacrificed national sovereignty for an ideal that is proving to be illusory. Its failure should not come as a shock.
For Greece, exiting the European Union and defaulting on its debts may be the most viable option, despite the significant disruptions it may cause. Financial markets could react adversely, and the stability of the European Union could be compromised. Yet, the alternatives are far worse.
Continuing to extend credit and pretending all is well will only exacerbate the issue. Markets may not always be forgiving, but they are swift to enforce reality upon those who evade it.
Unfortunately, those in power continue to resist this reality. Prime Minister Alexis Tsipras capitulated at the last moment, conceding to Germany’s reform demands—demands that Greek voters had recently rejected. Now, the Greek parliament faces a critical decision.
Whether it is a bluff or not, Greece ought to consider walking away from the negotiating table.
Sincerely,
MN Gordon
for Economic Prism
