Easier to Preach than Implement

Don't know if you have seen it, but an article in Der Spiegel states that although Angela Merkel and Wolfgang Schäuble have forced almost every Southern nation in the EU to take harsh austerity measures, they do not plan to follow that recipe themselves. With less than a year until elections, Angela Merkel is planning on increasing government spending in the form of subsidies and pension raises. While this may be speculative as the German Chancellor has committed to presenting a balanced budget for 2013, it is in severe contrast with Schäuble's on austerity in the current G-20 summit in Mexico City.

You see, as in most philosophies and other principles and values, it is easier to preach and condemn people for not implementing them or even force people to apply them, than to use them yourself. The great socioeconomic experiment we are currently witnessing in Greece (and will soon witness in Cyprus as well) is indicative of people who are stuck in ideology and cannot understand simple economic reality. I am not talking about complex equations or ideas here: what I mean is the mere understanding that if you cut salaries and wages things will get worse than what they were. Any high school student could see and understand this. Sadly, we have no high school students in a position to apply policy.

If austerity measures were implemented to reduce structural problems the countries were facing, I would admit that, even though rapid implementation is never good, the measures were aimed at producing something good. Nevertheless, the measures are only aimed at reducing expenses and not addressing problems. As a result, they do nothing to improve a country's well-being. In contrast, what they do is deepen the gap between social classes, as the lower class assumes most of the burden.

The Greek domino effect. Source: socialistrevolution.org

It would look like policymakers and politicians in the EU are not really reading any blogger articles. The EU blogosphere has been expressing its objections about this for months now. What seems to be even more amazing is that even though blogger voices against austerity have increased over time, nothing is being done to correct the situation. What I fear is not that a nation will be destroyed. It is the domino effects of this destruction that I fear the most. A Greek bankruptcy, or even a fall of the government, would most likely force the nation out of the Union and the common currency. And if this occurs then maybe Cyprus, Spain and Italy will also flee, thus rendering the EU a non-Mediterranean union. Although the ties between nations are strong, which can be evidently seen in the youth, they are nevertheless weaker in the older population. As the older generation rules, it will be more difficult not to follow suit if Greece exits the Union.

What is suggested above is not just a far-fetched scenario. It is one of extreme likelihood if the austerity measures are not passed through the Greek parliament. And I am not sure what is worse for the Greeks: the painful austerity plans or the fall of a government? In the long run obviously the second would yield worse results, but in the short run austerity will bring those of the Greeks still standing, to their knees. 

Unfortunately, Greece, as well as Cyprus in a few days, is at the mercy of its creditors. They tell the country how much it shall be lent, when and what is should do with the money. It is essentially being an unelected and uninvited government. Can you really blame the citizens for not liking the Troika and what it represents?

Greek Bankruptcy can help the EU?

In an article in Der Spiegel yesterday, Stefan Kaisser states that a Greek bankruptcy, although costly, is the best way to resolve the current situation in the EU. Current plans for Greece, as stated in the article, are the following: The Greek government is supposed to borrow the money it needs from the ailing Greek banks. In return, the banks receive sovereign bonds that they can, in turn, provide as securities for new loans from Greece's central bank. In this way, Greece's central bank is financing the Greek state in what is really just a kind of shell game that gets riskier the longer it is played. This arrangement reminds me of leveraging (the idea that instead of banks lending a proportion of what they have as deposits, they end up lending maybe 50 times more, a policy most large banking institutions adhere to) and is not one which leads to stability.

However, I do not believe that bankrupting Greece would solve anything.

On one hand, the consequences are unknown. Even Germany, with its strong economy, has to to prepare itself for a major economic catastrophe. And whilst the Germans may have the funds to bail-out their banks, most EU countries do not. So what would happen is that more countries will ask for help from the EFSF/ESM. What happens if these countries also face fiscal difficulties which would be a direct outcome of the Greek bankruptcy (and in essence German EU politics)? Let them go broke too?

The other big question is what happens after the bankruptcy. Does Greece go back to drachma or does it stay in the common currency? If Greece exits the euro then what is the message sent to other countries: bad fiscal planning and you are out of the euro? Will Greece be allowed to return after some years have passed? For conversation's sake let's assume that Greece does not do the stupid thing and remains in the Euro (although I highly doubt it, since anti-european movements will increase in popularity after a bankruptcy). What happens next? Who is going to lend a country which received enormous amounts of help from the ECB and the IMF and still managed to default? Guess: the ECB and the IMF again.

Although the Greeks should - and do - receive the blame for the situation in their country, Merkel's austerity remedies seem to have lost their charm since they have not been able to reverse the current situation. The Greeks themselves cannot do anything more than austerity measures and stimulus from the ECB anymore. What should be done is a change in German and EU politics: The ECB should be allowed to move directly and INDEPENDENTLY in order to buy Greek bonds or any other sovereign bonds deems proper, to restore order in the markets, just as a normal central bank would do.

Let us not forget that it is the Greek haircut we have to condemn for the current situation in the EU; and this is a direct consequence of political decisions (mostly German) which were based on flawed arguments. I do not think that it is too late for an ECB intervention which would end problems in the South in the next years and restore confidence in the markets.

As for the "spiral of threats and rescue actions" Berlin and Brussels got themselves into they only have to accuse themselves. It is never too late for admitting a mistake and moving on to correct it.