Contagion. Unemployment. Haircuts. Seemingly endless summits of the Troika. The news coming out of Europe continues to be bleak and at the center of the storm is Greece, a Eurozone member drowning in its sovereign debt. In the shadow of the global financial crisis of 2008, the specter of a disorderly Greek default has spooked investors and policymakers alike. Greece, a country that contributes less than 3% of Eurozone GDP, is holding the international economy hostage. The uncertainty arising from ineffectual rescue packages, prolonged negotiations, and poor implementation of austerity measures is slowing foreign investment in the EU and increasing volatility on the exchanges. Decisive action is desperately needed, but when will it come?
It is in both Greece and the Eurozone’s best interest for the inevitable to take place, now, before more rescue packages tie Greece to unachievable goals in the short run. Greece should default and begin the painful process of recovery outside of the Eurozone.
The Greek crisis is testing the long-term viability of the euro experiment, an integrated European fiscal and monetary union, with supranational standards for spending and taxation, a common central bank, and a common currency. Ironically, a leading motivation for the establishment of the Eurozone was to protect Europe from U.S. financial disruptions, when, in fact, the reverse scenario seems of greater concern today. With the possibility of Greece‘s sovereign debt default, banks, bondholders, and private creditors – those with high levels of exposure and counterparty risk – are on high alert and shaping (if not delaying) negotiations.
The EU makes up 20% of the global economy and constitutes the largest single market by GDP. In the Eurozone alone there are roughly 320 million people, comparable to the United States. But unlike the U.S. dollar, a national currency in a Federalist system, the euro is issued in states that maintain drastically different fiscal policies. How can policymakers realistically balance the interests of economic powerhouses like France and Germany, who contribute 50 percent of Eurozone GDP, with the interests and needs of the other fifteen member-states? The challenge before policymakers is to deepen European integration – the move toward political, economic, and cultural homogeneity – in order to sustain a Eurozone, while realizing when a line needs to be drawn in order to keep the whole thing from falling apart.
From a political standpoint, Greece does not appear to be adjusting with sufficient speed to justify inclusion in the zone. Its government is under siege; tax evasion is endemic across all levels of society; and people no longer trust the government due to its inept handling of the budget, most notably in the cooked books of the Papandreou government. From an economic standpoint, the longer the Eurozone waits to act, the more Greece’s balance sheet deteriorates. Since 2008, economic output has fallen by 6.5% and debt as a percent of GDP has skyrocketed from 133% to 163% on a linear projection. Interest rates will continue to go up. And culturally, it is time to accept and acknowledge the societal differences that give Europe its charming vibrancy. Put another way, when the Germans go to bed, the Greeks go out to dinner. Some things will likely never change in Europe and the architecture of the Eurozone needs to account for that.
Is there light at the end of the tunnel for Greece? In fact, recent economic history offers some cause for optimism. In December 2001, Argentina experienced the largest default on sovereign debt the world had ever seen. Like Greece, the default had been preceded by a decade of toxic economic policies, mismanagement, and corruption. A political crisis culminating in five different presidents over the course of two weeks exacerbated the economic situation. After accepting 22 billion dollars in aid through debt reduction deals and other channels by the end of 2001, Argentina had made little progress in the way of reform. The default was disorderly and disruptive.
But after drastic moves, including unpegging the Argentine peso from the U.S. dollar, and a series of post-default investments from the international community, Argentina rebounded with remarkable success. Today, you are more likely to read about the burgeoning start-up culture and innovation centers of Buenos Aires than you are about bailouts and unemployment. There is a path forward for Greece, but the time to default is now. Of course, innovation centers won’t hurt either.
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