Emotions are certainly running high in Europe about the proposed financial bailout of Greece and the consequences for the country itself. As a recent Guardian article written by Costas Douzinas, a Law Professor at Birkbeck, University of London reflecting the feelings of many Greeks, Greece is being asked as the price for EU support to impose severity measures that will reduce the budget deficit from 12.7% of GDP to 2.8% by 2012 in a country which already has youth unemployment at 25%, stagnating growth and the traditional industries of shipping, tourism and construction under immense strain. The fact Greece hasn’t a hope of achieving such a turn-around as tax revenues plummet will not mitigate the effects of the draconian measures being imposed to try. Yes Greece is (and has been for years) guilty of false public accounting running a black market estimated at 25% of GDP and excessive public worker largess have contributed significantly to the current woes. But where the US resolves it’s financial predicament with $787bn of stimulus measures and Japan runs a deficit of 227% of GDP, Greece’s solution being forced on it by the EU is severe austerity. The ire of Greek politicians those brave enough to put their heads above the parapets is directed to the hedge funds that have been shorting Greek bonds and by so doing brought the un-sustainability of Greece’s position to a head.
Indeed politicians across Europe, scared of who could be next have taken a similar line. Christine Lagarde, France’s finance minister, came out forcefully this week on the topic vowing to look at the “validity of credit default swaps on government debt, as if there is somehow something immoral or even illegal about betting against the sustainability of poor macro-economic models. In an FT article she fretted about the pace and direction of financial reform suggesting a growing belief among Europe’s ruling elite that the problem lies with the markets being allowed to make a judgment on their political and economic decisions when in reality the failure of the EU model is, as Paul Krugman wrote in the NY Times the model itself.
The danger is that politicians will seek to control the market rather than face up to what Mr. Krugman calls the “arrogance of elites who have pushed Europe into adopting a single currency well before the continent is able to accommodate it. As the BBC reported in a NY Times paper for the UK Treasury, monetary union formally began in the US with the ratification of the Constitution in 1788. But the US only assumed many of the characteristics of a full monetary union, such as an independent central bank and a single currency, over the following 150 years giving states time to adjust their economies and policies over decades. In the EU, politicians pushed through monetary union in a matter of years in spite of repeated warnings from economists of the dangers and after seeing Britain have to pull out of the predecessor the ERM in 1992 following a run on the pound by you guessed it hedge funds. In hindsight, those hedge funds did Britain a lasting service freeing the economy from having to live within an arbitrary budget deficit of 3% of GDP set for the convenience of the then Bundesbank.
It is almost unthinkable that the EU will break up. The big two of Germany and France will bailout Greece, and after Greece will come Portugal, and then Spain, all of whom have been squeezed into a straight jacket they did not fit by politicians more interested in creating a lasting legacy than in plain common sense their legacy may be years, possibly a decade, of muddling through and slow growth, not to mention the possibility of social unrest.