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Wednesday, June 9, 2010

The Greek Tragedy

It’s Pretty Real! 

The recent happenings in Greece—perceived inability of Greece to service sovereign debt, falling credit rating and the resulting rise in interest rates—are so real and hard hitting that the European Union (EU) should not get simply carried away by the mere announcement of the rescue plan: creation of a colossal rescue fund of €750 bn, amounting to around 8.2% of the Zone’s GDP, to protect its currency in the form of €60 bn of EU backed bonds, €440 bn fund guaranteed by eurozone countries, and €250 bn of International Monetary Fund money; for the tragedy of government-bond markets is now spreading to banking system and is indeed on its way to inflict global credit markets. During the month, the euro has lost around 7% against the dollar.

Even after the announcement of an exclusive rescue package of €110 bn by the European Union and IMF and the Greeks announcing an austerity package as suggested by the IMF to contain fiscal deficit, Zeus does not appear to be pleased to quell the storm. In the meanwhile, global stock markets have turned highly volatile. The unilateral announcement of Germany on 18th instant banning naked short-sales under government bonds had tanked the global stock market indices: BSE Sensex tumbled down by 467.27 points, Japan’s Nikkei lost 55.80 points, Hong Kong’s Hang Seng lost 365.96 points, UK’s FTSE 100 was down by 107.24 points, and Dow Jones was down by 66.58 points.

There is a feeling among certain quarters like the ilk of Krugman that the current fiscal problems in Greece are, to a great extent, a direct fallout of the single currency, euro. True, had Greek not been a member of the common currency, the moment its bond rates mounted up in the global markets owing to its likely-failure to service them, it would have devalued its currency to make its exports more competitive and pulled itself out of the fiscal crisis without much ado. But today, it has to look at the other member countries of the union to get itself bailed out of the current mess, while the markets are discounting its credibility to service sovereign debt further and further down.

Even with the announcement of rescue package by the rest, its woes do not come to an end for, to catch up with the prescriptions of EU—reducing deficit from 12.7% in 2009 to 2% by 2013—Greece has to cut down its expenditure and increase taxes. The net result would be: one, its manufacturing sector, which is already suffering from recession, will now face a ‘double dip’—industrial output will further contract, that too, much faster as the rise in VAT and special duties and reductions in wages and salaries of civil servants reduces the buying power of consumers leading to fall in domestic demand for goods; and two, with the fall in the purchasing index, its credit rating will get further hit, which means, high interest rates on fiscal borrowings. Further, its citizens are already on the streets protesting against government’s acute austerity measures. And all this is attributed to Greece’s inability to have independent monetary and fiscal policies of its own. It is in this context that some accuse that the adoption of common currency by the member countries of the European Union well before the continent was ready for such an experiment—monetary union sans political union—was like putting the cart before the horse.

Maybe, the statement per se is true, but is this the underlying reason for the current financial mess in Greece? Isn’t it the overborrowing by Greece merrily at German interest rates but with no sufficient economic growth to match the borrowings that resulted in its inability to service debts? Isn’t it the inefficiency of the previous government of Greece—which, sitting prettily in the Euro-club, failed to launch the much-needed reforms though unpopular, such as reforming labor laws to make its business more competitive in global markets—that is responsible for the present crises? Isn’t it the fiscal profligacy of the inefficient governments of Greece, Portugal, Spain, Italy, etc., that is responsible for the current run on confidence in the very euro, the single currency of 16 countries of the Union that enabled them enjoy stabilized prosperity for the last decade in the world’s most successful zone of sound money and commerce?

An honest answer is: ‘Yes’, for what EU is today facing is a debt crisis, not a currency crisis. But as “We can’t solve problems by using the same kind of thinking we used when we created them”, the EU members have to adopt out-of-the-box ideas to overcome the current crisis and save the concept of European Union and the common currency, euro, which is, of course, in their long-term interest. It makes great sense here to recall what Hooghe and Marks (2001) got to say about regional integration: it involves “the dispersion of authoritative decision-making across multiple territorial levels.” If this is accepted in principle, it becomes easy for member countries to exercise “cross-border budgetary coordination”—a mechanism suggested by Strauss-Kahn of IMF that involves “stronger surveillance and tools to organize transfer from one part of the area to other parts” so as to avoid such recurrences.

Lastly, it makes great sense for Greece and for that matter every country that is today merrily practicing fiscal profligacy under one pretext or other, to heed the Homeric edict: “Men are so quick to blame the gods: they say / that we devise their misery. But they / themselves—in their depravity—design / grief greater than the griefs that fate assigns.”

                                                                                                                 - GRK Murty


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