Greece’s overwhelming “no” vote in the referendum on its creditors’ demands is a lesson to present and future creators of global economic groupings: supra-national bodies must have supra-national authority to enforce their fiscal rules or else they will ultimately fail.
The European Union and the eurozone – the common currency area – have been unable to run uniform rules from the outset, and, in the past, they have allowed the big brothers – France and Germany – to breach their fiscal deficit targets simply because they were too big to be opposed. Greece is the minnow now demanding the same indulgence when its economy is in serious decline and its people are hurting badly with super-high unemployment rates.
Is there a logical solution to Greece’s defiance of its creditors’ demands for more sacrifices? Or will Greece be turfed out just because it is too small to matter? Or will the EU swallow this rebuff from the Greek people and allow Greece to remain in the euro (and even the EU), kicking the can further down the road.
Actually, both options have consequences not only for Greece, but the rest of the EU.
First, whether it is in or out, Greece will see commercial credit drying up and will have to tighten its belt to clean up its economic mess. Going out of the euro will allow it to at least control its economic destiny and redesignate its debts and force lenders to accept big hair-cuts. Also, a new drachma – Greece’s pre-euro currency – will decline sharply against the euro, allowing Greece to at least export more and bring in droves of tourists. Imports will be costlier, and inflation could spike. Either way, Greece will pay for its sins, and will have to meet the crisis all by itself. But it can be the master of its own destiny.
Second, the eurozone’s other weaklings will also pay a price: Spain, Portugal, Italy – and possibly even France. Creditors to these countries will wonder if they will also demand sacrifices to pay up – and debt costs could go up. Ultimately, even they will have to tighten their belts.
Third, the least talked about parties are Germany – the bedrock of the eurozone and its prime beneficiary – and some strong economies of north Europe. It is obvious that before Greece happened, the eurozone allowed Germany to export to all its weak southern European neighbours using its competitive advantages. The benefit the rest got from this arrangement was the right to borrow at low rates despite their high deficits. Put another way, Germany’s weaker partners in the eurozone got cheap money to buy German goods – similar to the situation where China invested in US treasury and used the resultant purchasing power of America to export more to the US.
Neither system was sustainable. China now has to look inwards for growth, even though the US temporarily looks like it has weathered the global financial crisis. But even the US cannot expect the world to keep lending it money endlessly to buy more of their experts.
So what does the future hold?
i) The eurozone cannot survive. The strong and the weak cannot afford the same currency as the more competitive countries (Germany, Finland, Holland, etc) have an undervalued currency, while the less competitive ones (Spain, Portugal, Italy, and even France) have an overvalued euro hampering their economies. The strong will gain at the cost of the weak in a unified eurozone.
ii) The only way for the weak to stay in the eurozone is by cutting their own costs and reforming to become as competitive as Germany. If they don’t do that, they will be driven to the same fate as Greece – unless Germany can pick up their bills endlessly. Germany found one Greece hard enough to tame. Greece’s exit actually putw the other weaker nations in a stronger bargaining position vis-a-vis Germany.The only way for the weak to stay in the eurozone is by cutting their own costs and reforming to become as competitive as Germany. If they don’t do that, they will be driven to the same fate as Greece – unless Germany can pick up their bills endlessly. Germany found one Greece hard enough to tame. Greece’s exit actually putw the other weaker nations in a stronger bargaining position vis-a-vis Germany.
iii) The only logical way out is to retain the EU common market, but to create two euros – the stronger northern euro anchored by Germany; and a weaker southern euro. Since the souther euro would have no lender of the last resort, they would be better off creating theor own currencies.
The best option would be for Germany itself to leave the euro and recreate its Deutschemark – or retain the eurozone in a truncated form.
After the Greek “no”, the eurozone is probably over. Time to recognise reality. Political sovereignty is tough to reconcile with economic interdependence beyond a point. Political autonomy with fiscal indiscipline is simply a route to disaster. As Greece has showed.