Greek debt crisis bids ill for us all

I think of myself as an optimist. Over the years, I have seen a lot of crises resolved, as often as not by what can only be described as muddling through.

It is hard to see how the world will muddle through the Greek debt crisis. “New Bailout is a Reprieve for Greece, but Doubts Persist,” was the February 21 headline in the New York Times. Count me among the doubters.

As complicated as the debt crisis is, the resolution of the problem is in the hands of two governments — Germany and Greece — and, more important, the electorates in each of those democracies.

Before I explain that, let’s look at how grim the situation is. The Greek national debt stands at 160 percent of GDP. In order to get relief from the rest of the Eurozone (read: Germany), the government had to agree to get that down to 120.5 percent by 2020. In order to do that, Greece has introduced severe austerity measures that will slash 150,000 government jobs, cut private sector wages by 22 percent, reduce or eliminate pensions, sell off public enterprises, and raise taxes. All this in a country where unemployment among those under 25 is just under 50 percent.

Here’s the Catch-22: If the government were able to do all of this (a big if), the immediate effects on the Greek economy would be crushing. The austerity measures are bound to shrink the economy, thus making the debt-to-GDP ratio even worse.

Meanwhile bondholders have agreed to a 50 percent cut in value, and the second round of bailouts just announced allows Greece temporarily to avoid a default. But what happens now?

Within Greece, the people have to agree with what their leaders have promised to its Eurozone benefactors. Will they accept the extreme hardships that will be imposed on them? Greece is a democracy. Ultimately, the government will either respond to what the people want or it will fall. The riots and the burning of buildings in Athens aren’t hopeful signs for the current government.

Germany, which essentially controls the Eurozone, is a democracy as well. Just how many billions of their money will the German people sacrifice to prop up a country they consider irresponsible? Contrary to many press reports, Germany has demonstrated more than most countries a willingness to take on the burdens of others. West Germany shouldered a herculean economic load when the wall came down and it merged with East Germany. But a strong majority of Germans do not believe they should finance a country like Greece, particularly when the social benefits offered there have been greater than their own.

Put yourself in a German’s place. You pick up your newspaper last October and read that Diomidis Spinellis, the head of a Greek Finance Ministry task force to stop tax evasion, has thrown up his hands in disgust and quit because of a lack of will to stop the corruption that permeates the tax system. Obviously the systematic tax evasion that has long been part of Greek culture is proving difficult to change. Spinellis charged that tax collectors continue to skim off the top of taxes they do collect, and many publicly identified tax avoiders have still not paid their taxes. Am I, as a German, going to support my government if it wants to send more of my money to this place?

Add this: If you are a law-abiding Greek taxpayer, given what austerity is doing to your job or your business, paying greatly increased taxes may prove impossible.

There are lots of Catch-22s in this terrible crisis, and they should have been taken into account when the Eurozone was first established. The countries that joined gave up control of their individual monetary policies when they lost the ability to control their money supply. It was clear from the beginning that Germany would end up in effective control of Eurozone monetary policy because of its size, economic power and culture. It should also have been clear that part of that culture was a deeply ingrained fear of inflation, a legacy of the collapse of the Weimar Republic.

We are watching a tragedy unfold, one that could ultimately have wide-ranging negative effects on own economy. I can only wish I were more optimistic about our chances of muddling through.

Originally published 25 Feb 2012 on