Prime Minister George Papandreou has rejected pressures to resign, but officials close to the leader expect him to scrap plans for a national referendum on the European bailout for Athens’ finances. Sadly, Socialists inside the fragile governing coalition and Continental political elites decided democratic decision making is a threat to their designs for One Europe. Democracy be damned!
Papandreou’s concession came after Socialist Finance Minister Evangelos Venizelos split with the coalition raising the likelihood a vote of no confidence would succeed. And President Nicolas Sarkozy, Chancellor Angela Merkel and other leaders publically challenged Papandreou to unconditionally accept the bailout. They see a referendum threatening their cherished euro. This false obsession with a single currency places at great peril the welfare of Greek people and their democracy.
The bailout plan would cut in half the privately held Greek sovereign debt. However, to receive this concession and other aid from richer EU governments, Greeks must accept draconian austerity measures. These would further drive up unemployment, and shrink Greece’s economy and tax base at an alarming pace, placing in jeopardy eventual repayment of Athens’ remaining debt.
Ultimately, Greeks would face reductions in their standards of living upwards to 50 percent, perhaps more, to generate the exports necessary to pay off foreign creditors. If everything goes as planned, Athens will still be saddled with a debt that is 120 percent of their GDP a decade from now.
Everything hardly ever goes exactly as planned, and 120 percent of GDP is an amount most economists believe is unworkable. Hence, the Greeks may bleed a lot for no real purpose than to sustain a failed experiment in a single currency, and the odds are steep against the plan succeeding.
Greece’s finances could easily be in disarray again within a year or two—perhaps sooner if the economic meltdown imposed by austerity snowballs.
The Greek people should be given the opportunity to vote on taking such a gamble, and their fate should not be left to leaders far beyond their borders and who they did not elect.
It is convenient for Europeans to blame the Greek mess on a government and citizens who deluded themselves into believing they could live beyond their means—forever—but the euro zone was fundamentally flawed from the start. It lacked the common fiscal institutions needed to somewhat equalize the social safety net across its participants.
More importantly, EU institutions are ill-equipped to deal with the fact that common currency across widely diverse economic regions and political jurisdictions will be overvalued for some—as in Greece, Italy, Spain and Portugal—and undervalued for others—like Germany. This makes the latter hypercompetitive, and leaves the former with chronic trade deficits, shortages of currency, the need to borrow, and eventually the crises these nations face today.
The bailout plan is a giant band aid for a failed euro and the mistaken belief that a common currency is necessary for a united Europe.
The EU was making very good progress toward an integrated continental market and greater political and cultural cohesion before the euro. The euro has become a symbol without a purpose—indeed a symbol with a destructive end.
Greeks should be given the option of staying in the EU but dropping the euro—essentially the status the UK enjoys. By readopting the drachma, remarking sovereign and private debt to the reinstituted national currency, and letting the value of the drachma fall to levels consistent with a trade surplus that permits Greece to service its debts, Greece’s economy would begin growing again, and many of Greece’s army of unemployed would be put back to work.
With a reinstituted drachma, foreign creditors would receive payments on Greek debt less than they are currently owed as stated in euro. However, with the Greek economy more fully employed and generating exports, the haircut a reinstituted drachma would impose would be far less than will ultimately occur though the mindless austerity now imposed.
Breaking ranks with the government, Venizelos stated “Greece’s place in the euro is a historical conquest by the Greek people that cannot be placed in question… this cannot be made dependent on a referendum.”
That thinking is backwards. The Greeks should accept the bailout and continue in the euro only if they determine the currency serves them well. As currently constituted, a single currency may serve the One Europe designs of France and Germany, but make Greece and the other Mediterranean states nothing more than the victims of a northern conquest.
Peter Morici served as Chief Economist at the U.S. International Trade Commission from 1993 to 1995. He is an economist and professor at the Smith School of Business, University of Maryland.