The standoff between the European Union (EU) and Greece is at a crisis. Greece with its new far left government wants to remain in the Eurozone. It also wants to raise the minimum wage, expand a bloated government bureaucracy, restore sclerotic labor regulations and keep inefficient public enterprises. Right. And I want to go on an all ice cream cake diet without having a heart attack.
What the Greeks want is irreconcilable. There is no way the EU is going to give the Greeks a pass. Prime Minister Alexis Tsipras and his left-wing populist party Syriza cannot possibly accept the terms from the EU.
The only path forward is for Greece to leave the Euro – and it’s a path that should have been taken at least two years ago.
To understand the Greek Euro crisis, it is important to know two facts: 1) The Euro was always a political project masquerading as economics and 2) Greece never should have been let into the Euro in the first place.
There are certainly gains from having a common currency. Transactions are easier. The larger the economy, the more robust the currency is – that is resistant to collapse. But a common currency is by no means some miracle of economics. It does not fix structural problems. And, when the needs of the smaller national economies become incompatible with the policies of the largest economy, trouble follows.
This last problem is what is occurring in Europe. Germany is the behemoth economy in the Euro and its policies drive the currency. Greece and other weak economies with high debts need a different policy than that of Germany.
This course of events should not be a surprise. With regularity over the past century, small nations have adopted the U.S. dollar as their official currency, often to combat inflation and restore confidence. But, just as regularly, such nations have abandoned the dollar once macroeconomic conditions turned positive. The reason? A direct currency tie-in means that nations using the dollar would have their monetary policy move in sync with the American economy, regardless of local conditions. That economic cost can outweigh transactional advantages.
This lesson was ignored by the politicians of Europe and the economists whose pet theoretical models predicted smooth sailing. Instead, the European elite assumed that the Euro would pull the continent together. Its adoption would result in the creation of a unitary economic and political unit, casting aside quaint notions of nationalism and local culture. The leaders figured economies would seamlessly integrate and everyone would become a good German, I mean European. Most importantly, the Euro would be another step forward in challenging American political and economic leadership.
The Euro was all politics and ego, and never really about economics.
As for Greece, the country was not qualified for the Euro when it was admitted. When the Euro was launched, each constituent nation was required to pass a series of fiscal and policy hurdles. Greece got in, but only by fudging numbers.
In addition to a faked application, Greece was in a terrible structural condition. Tax evasion was rampant. Corruption permeated both government and its inefficient state-owned industries. Greece had one of the lowest birth rates in the world and little immigration to compensate. The result was a fast-aging, sclerotic economy with a nice helping of thievery mixed in.
Today, Greece has an utterly unsustainable debt of 175 percent of GDP. There is zero chance the Greeks can even afford the interest on this debt. Only a highly competitive nation with a growing population could possibly handle such an obligation – and Greece is neither. The people of Greece have gone through a period of privation with no end in sight and the hard work yet to be done.
An exit from the Euro, currency devaluation and the consequent collapse in the nominal national debt is the only way out.
Yet, European politicians and economists resolutely claim, in Soviet-style groupthink, that departure from the Euro would be an unmitigated disaster. It would spell the end of the Euro, the EU and forever fracture Europe. Economies and markets would collapse, unemployment up, mass hysteria.
What is really going on is that the European elites got it wrong and don’t want to admit it. Nobody wants to tell the emperor he has no clothes.
But there are a series of important positive outcomes from a “Grexit.”
First, the Eurozone would learn how to handle the departure of one of its members. The idea that any Eurozone member must keep the currency for all time is ridiculous. Economic conditions change and nation-states should be able to act flexibly. The Euro is just a tool. When the tool stops working, it should be set aside. Besides, if the Euro is so fragile that the departure of the second smallest economy wrecks it, then the Euro is the problem.
Second, bond buyers need to get a little moral hazard wake-up call. Anyone dumb enough to buy Greek bonds over the past 10 years deserves to get wiped out. Finance only works when both borrower and lender are at risk. Guaranteeing creditors no matter what only ensures irresponsible lending.
Third, people need to be reminded periodically of what happens when a nation adopts insane economic policies. And make no mistake, Syriza’s policies are insane. The welfare state can only exist upon a foundation of strong, competitive capitalism and the wealth it generates. Syriza thinks that it can just legislate prosperity. There is a value to the world seeing that such a path is foolish. In addition, a Greek tragedy would be a warning to other larger Euro nations (looking at you, Italy) that they must reform.
Fourth, it might not be so bad. If there is anything we have learned over the past 8 years of economic turmoil, it is that macroeconomic predictions are more alchemy than science. It is possible that the Greeks will exit and be much better off and the EU will carry on without missing a beat. I doubt it, but it’s possible.
Economics has an inconvenient way of destroying political fantasy. The Greek Euro crisis is just the latest example.