The Euro sculpture sits in front of the European Central Bank in Frankfurt, Germany, Apr. 28, 2010. Three weeks away from potential default, Greece saw its borrowing costs spiral higher, a day after Standard & Poor's downgraded its bonds to junk status.
"Cost of Germany Bailing Out Greece is Damage to the Euro"
Op-Ed, The Scotsman
May 5, 2010
Author: Azeem Ibrahim, Former Research Fellow, International Security Program, 2008–2010
Belfer Center Programs or Projects: International Security
IMAGINE the following scenario. A council in a far-flung corner of England has, over a number of years, been quietly committing fiscal suicide.
It is up to its neck in debt. It has failed to balance its budget for enough consecutive years to be seriously bankrupt. It has lied about its accounts so often that its members don't see anything strange about it any more. And it's hard to see how can raise much money in future years, as informal barriers to entry make it a no-go area for any new investment.
I don't think it's hard to imagine what would happen in this situation — the government would bail the council out. Regional disparities like this happen all the time, but in general most of us accept that it's the government's job to iron these things out.
We would feel differently if we had to bail out another country, though? This is the situation that membership of the euro puts Germany in. The fate of its currency is no longer something which it has much control over. And the largely frugal voters of Germany are now being asked to bail out a country which has serially spent much more than it has brought in, lied to the EU about it, and proved it is incapable of change. Worse — this behaviour is affecting the value of the euro in the pocket of those very German voters whose money is already being spent bailing Greece out.
As much sympathy as I have for Greece's population who will have to suffer under any plausible scenario, I have little for its government. Its budget deficit in 2009 was 12.7 per cent of GDP, and its overall debt was 113.4 per cent of GDP — figures which take some years of mismanagement to achieve. The European Commission issued a report last year saying that the finance ministry had committed "severe irregularities" stemming from "the submission of incorrect data".
The country also has an old-fashioned legal system and its land registry is not computerised and centralised, unlike most developed countries, meaning that if a farmer starts cultivating public land, he will eventually become its de facto owner. The country also makes it very hard to start a business or invest, both for legal reasons and informal ones, which is why it has one of the world's lowest levels of foreign investment.
Worst of all, the government can't change anything. Having declined to explain the situation honestly to Greek voters, it is faced with a population who regard any measures which might improve the public finances as needless political cruelty and stinginess.
Enter the single currency. What it effectively does is mean that the consequences of Greece's profligacy rebound on those countries which share its currency. When Greece defaults on its debts, the rest of the eurozone countries suffer. And that means that the richer, more responsible eurozone countries — and that mainly means Germany — are called upon to bail Greece out. But unlike the UK government bailing out the rogue council, there is no way for the more responsible countries to get Greece to change its behaviour to make sure it won't happen again. Worse, many argue that bailing out Greece makes it less likely to change its ways in the future, as it means that it does not have to face the consequences of its profligacy.
The lesson for the euro – and so for us, standing on the sidelines and weighing up it's pros and cons — is that in its first decade of life it was a rather misunderstood currency. Its perceived strength, and thus its strength in the money markets, was based not only on Europe's perceived global role, but also on the relative stability of its strongest members.
It's no surprise that there's so much anger in Germany at being so tethered to Greece. Apparently one German tabloid journalist recently pulled a stunt which struck a chord: going to Greece with a handful of drachma notes and offering them to locals. The message was clear. In the euro, Greece is the weakest link, and for many in Germany that means just one thing: it should kiss the euro goodbye.
Azeem Ibrahim is a research scholar at the Kennedy School of Government at Harvard University, member of the board of directors at the Institute of Social Policy and Understanding and chairman and CEO of Ibrahim Associates.
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