No Good Options for Greece, But There Are Options

National Review Online

Monday, July 06, 2015

Europe’s Greek crisis has always been conducted in and through confusion, but the 61 percent victory for the “No” option in Sunday’s referendum — in effect a refusal of new bailout terms offered by Europe’s creditor institutions — has produced reactions that are perverse even by EU standards.

The most perverse is the idea, voiced by among others Chancellor Angela Merkel, that other countries must “respect” Greece’s vote. Unless this means nothing at all, which would be the most hopeful interpretation, it must mean that the rest of the world should take a sympathetic view of the desire of Greek voters to help themselves to other people’s money — and then offer Greece more money on softer terms. Such an exercise has nothing to do with democracy — which is about how a country’s internal affairs should be conducted — and everything to do with international socialism. Socialist countries run out of other people’s money quite as effectively as socialists in a domestic political context. So they look for others to pay their debts — Mrs. Merkel, though she has toughened her talk today, is looking like a nervously soft touch here. Ditto the Italian prime minister, Matteo Renzi, even though his friendliness to Greece must be interpreted in part as his investment in the prospect of future loans for Italy.

Another argument is that the various loans and bailouts granted in the last six years have been spent on repaying previous monies borrowed by Greek governments and that therefore they haven’t really “gone to the Greeks.” This kind of argument is a favorite of the left-wing NGOs that now act as shyster lawyers for the world’s deadbeat governments. But if one loan is paid by another, then the first loan has gone to the Greeks. And if the second loan is paid by a third and then the third by a fourth either ad infinitum or ending in a debt write-off, then the Greeks have been given not a loan but a grant or gift. As matters now stand, that is the Greek situation. Nor are the sums small. Greece may be the most officially assisted government in history — somewhere in the range of the high two hundred billions or the low three hundred billions of euros.

A third argument is that much of this money was given to Greece not for the country’s sake but to “save” the euro. That is in part true, and in the case of the International Monetary Fund, it is a shameful betrayal of the fund’s responsibility to its client states outside Europe. If a former French minister, Christine Lagarde, had not headed the fund, it would almost certainly not have devoted such large sums to the two sad European cases of Greece and the euro. Her resignation must surely follow soon. But whether or not the motive was to save the euro (or in the case of Mrs. Merkel, to protect German banks), the fact of the matter is that the money went to Greece.

A fourth argument is that Greece has “suffered enough.” Well, Greece has certainly suffered. Estimates suggest that Greek living standards have fallen by approximately one quarter in the last five years despite being padded by these large payments. One response should be to inquire exactly where the money went because the part of it that went to “the Greeks” didn’t always end up in the pockets of the poor. But the larger reply must be to point out that Greek living standards have fallen precisely because the Greeks demanded and got membership of a currency that is overvalued for their economy. If they are to become competitive with northern Europe, they have to embark on what is called “an internal devaluation” or a fall in living standards of, well, let’s say a third. That’s not a bug but a feature of the euro. Greek living standards must fall further (and in the most painful way possible) if the country is to remain in the euro — and therefore subsidies from abroad would be needed to soften the fall even if Greece were to conduct its finances with greater prudence.

Under all Greek governments, Syriza not excluded, Greece has not conducted its public finances well. The program of cuts has avoided many of the over-generous welfare programs (early retirements especially) that proliferate in Greece, and the program of taxes has hit the revenue-producing middle classes and industries hardest.

That said, the main problem facing Greeks and dooming them to perpetual crisis is that they want to remain in the euro — that’s all parties and both Yes and No voters in yesterday’s referendum. While they are inside the single European currency, they will need money from outside to prevent a further fall in living standards and ever-rising unemployment. They will be unable to repay these new debts, and increasingly unable even to service them. And it is beginning to look as if the negotiating strategy of the Greek government is to create a humanitarian crisis in the country as a way of forcing its European “partners” in the euro to cough up.

It would be folly to do so since it would encourage not only Greece but left-wing parties throughout Europe to believe that they could also blackmail more prudent countries to subsidize them in bad times — and that would lead to the over-production of bad times. At the same time the Greek problem must be solved. How?

Wolfgang Schauble, Germany’s tough finance minister and until now an unyielding supporter of an unreformed euro, has suggested the way in a brief newspaper interview. He speculated that it might be possible for Greece to leave the euro “temporarily” and rejoin at a later date, presumably at a lower effective exchange rate, in order to escape the pains of an internal devaluation and to benefit from the lower prices that a formal devaluation would bring. This suggestion is not as comprehensive a solution as National Review’s own favored division of the euro into northern and southern “European” currencies which would assist all of Mediterranean Europe simultaneously (and settle the euro problem for a very long time). And from Schauble’s standpoint, it must increase the risk (if it succeeds) of encouraging Portugal, Spain, and Italy also to depart from the single currency temporarily, transforming the euro therefore into a fixed but flexible exchange-rate regime. But though it would weaken the ideal of the euro as a force for European unity, that would be no bad thing. It would also be something rare in this debate — namely an accommodation to reality.

In order for Grexit to have a chance of working for Greece today, however, there would have to be another serious renegotiation of Greece’s debts, involving write-downs and maybe an even longer repayment schedule. Greece does not deserve to have its debts canceled, but, once it left the currency union, any hope of repaying its euro debt (denominated in a currency likely to be far stronger than any “new drachma”) would disappear. Also, the European creditors, institutions and governments, deserve to suffer something for their repeated folly in lending to governments to ameliorate problems that their utopian currency conceptions created in the first place. We start from a bad place, but this combination of policies — leaving the euro and debt relief — offers some hope for the future.

If Greece remains in the euro, however, any debt cancellation would be pointless and self-defeating. Greece must give up its (self-destructive) dream of equal membership in a currency alongside Germany or get no debt relief at all. The bonus would be that Greeks and the rest of Europe would learn the limits of democracy. You can’t write a check on someone else’s account.