It was a couple of years ago, around the end of 2012, that Greece was seemingly on the edge of default every day and finally got bailed out by its EU brethren in return for promises of "austerity." After a round of half-hearted small spending cuts and big tax increases, plus some debt "restructuring" and loans from other EU countries, Greece proceeded to stumble on for two years and now is more or less right where it was back in 2012.
Today Greece has an election coming up (on January 25) and the guy leading in the polls is Alexis Tsipras of the left-wing populist Syriza party. He's promising an end to the "austerity" and repudiation of some or all of the sovereign debt. To no one's surprise, Greek sovereign debt has spiked to interest rates over 10%. Credit default swaps are indicating a chance of default of 20% in one year and over 50% in five years. Talk in the air is that there will either be another bailout or that Greece will exit the euro.
Well, as I said just a few days ago, a good way of looking at capitalism is that the whole idea is to force hard economic choices to be made. Greece is caught up in vast wasteful overspending by the government and desperately needs the shock of some economic discipline to force it to stop. The rest of Europe has also gone into seemingly permanent stagnation from overspending, although not to the level of the crisis of Greece. Yet when I look around for some kind of sensible economic voice, all I can find are advocates for some kind of continuation of the status quo to avoid the "pain" or "suffering" or "disruption" that would come from a Greek default or exit from the euro.
Do you think the Economist is sensible? Forget it. In the most recent issue they are urging "caution" and yet more "monetary and fiscal stimulus." Let's see if we can hide the problem with yet more government spending while things fester for a few more years!
That stagnation points to the deeper reason for caution. The continuing dismal economic performance of the euro zone now poses a big political risk to the single currency. In the short run, so long as creditor countries (and that means principally Germany) insist only on budgetary rectitude and reject all proposals for further monetary and fiscal stimulus, that performance seems unlikely to improve.
The Economist asserts that the Greek economy has shrunk by 20% since 2010. All that means is that they are taking fake government numbers -- that count all government spending at 100 cents on the dollar in GDP -- at face value. Although honest numbers do not exist, it is likely that getting rid of some of the government waste was one of the best things that could happen to the Greek economy. Yes, it is undoubtedly hard on those who were employed at the make-work to have to re-deploy into productive enterprises; but postponing necessary adjustments only means that the adjustments will be even more disruptive and difficult when they finally come.
All kinds of people can come up with all kinds of inchoate fears to justify continuation with the unsustainable status quo. Here is Megan McArdle at Bloomberg on January 5:
[A Greek] exit [from the euro] will be a disaster. The mechanics of a Grexit are beyond daunting. The financial system will have to be frozen in order to keep people from immediately withdrawing all their euros and attempting to find them safe harbor abroad. And what do people use for money? In the long run, Greece may be better off, but in the short term, there will be immense suffering. And the contagion may well spread beyond Greece; Ireland seems to have escaped the trap, but Italy, Portugal, and Spain all remain vulnerable.
"Immense suffering." Really -- on what basis?
Or here is Tim Worstall in Forbes on January 4 predicting yet a different form of disaster:
Greece leaves the euro, the banks fail (likely, if not entirely certain) and then? Sure, the first 12 months will be pretty hairy but our standard solution then predicts that we would see significant and sustained growth in the Greek economy. It wouldn’t be a surprise to see several years of growth in the 5-10% of GDP sort of range. Then what happens? Does Italy, already in the beginnings of a terminal debt spiral, then say, well, we’ll go for that internal deflation route? Or do they start polishing the lira printing presses and leave the euro? What about France that is getting close to such problems? Belgium which is already over the hill and well into this area?
There is really no alternative to some kind of major economic disruption to jolt Greece out of its mess. The only question is, take it now or postpone it and hope it goes away. It will not go away. If postponed, when it comes it will be worse. Time for a little bravery!