Greece and the Euro: Towards Financial Implosion
by Prof. Rodrigue Tremblay
July 14, 2011
“If you can’t explain it simply, you don’t understand it well enough.” Albert Einstein (1879-1955), German-born theoretical physicist and professor, Nobel Prize 1921
“It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world.” Thomas Jefferson (1743-1826), 3rd President of the United States (1801-09)
“Having seen the people of all other nations bowed down to the earth under the wars and prodigalities of their rulers, I have cherished their opposites, peace, economy, and riddance of public debt, believing that these were the high road to public as well as private prosperity and happiness.” Thomas Jefferson (1743-1826), 3rd President of the United States (1801-09)
On the 4th of July, the credit agency Standard & Poor called Greece what it is, i.e. a country in de facto financial bankruptcy. No slight of hand, no obfuscation, no debt reorganization and no “innovative” bailouts can hide the fact that the defective rules of the 17-member Eurozone have allowed some of its members to succumb to the siren calls of excessive and unproductive indebtedness, to be followed by a default on debt payments accompanied by crushingly higher borrowing costs.
Greece (11 million inhabitants), in fact, has abused the credibility that came with its membership in the Eurozone. In 2004, for instance, the Greek Government embarked upon a massive spending spree to host the 2004 Summer Olympic Games, which cost 7 billion euros ($12.08 billion). Then, from 2005 to 2008, the same government decided to go on a spending spree, this time purchasing all types of armaments that it hardly needed from foreign suppliers. —Piling up a gross foreign debt to the tune of $533 billion (2010) seemed the easy way out. But sooner or later, the piper has to be paid and the debt burden cannot be hidden anymore.
Greece’s current financial predicaments (and those of other European countries such as Spain, Portugal, Ireland and even Italy) are not dissimilar to the ones Argentina had to go through some ten years ago. In each case, an unhealthy membership in a monetary union of some sort led to excessive foreign indebtedness, followed by a capital flight and a crushing and ruinous debt deflation.
In the case of Argentina, the country had decided to adopt the U.S. dollar as its currency, even though productivity levels in Argentina were one third those in the United States. An artificially pegged exchange rate of one peso=one U.S. dollar held for close to ten years, before the inevitable collapse.
Indeed, membership in a monetary union and the adoption of a common currency for a group of countries can be a powerful instrument to stimulate economic and productivity growth, with low inflation, when such monetary unions are well designed structurally, but they can also turn into an economic nightmare when they are not.