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The Greek Tragedy

GRK Murty
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.”

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