Contagion? Greece, The Eurozone And The American Economy

When The New York Times lumps you in with “some of the world’s poorest and worst governed nations, including Iraq, Sudan, Somalia and Zimbabwe,” your life and your pride are both in the toilet. That was the newspaper’s description of Greece after it effectively defaulted on a loan from the International Monetary Fund last month. Five years old, the Greeks’ nightmare of punishing austerity, the price for an endless cycle of rescue loans from Europe, particularly Germany, would be a soap opera but for the horror movie aspects.

the Greeks’ nightmare of punishing austerity...would be a soap opera but for the horror movie aspects.

With a deal just struck for more harsh belt-tightening in exchange for another bailout and Greece’s continued Eurozone membership, Americans may have two questions: Will the deal end the Greeks’ misery? And might Europe’s financial sickness leapfrog the Atlantic and thud on our own fragile recovery? The probable answers are no and no.

I’m no economist, just a layman anxious that the world not blunder into another great recession so soon after the last. And make no mistake: Europe’s financial nosedive has been due to pilot error, and I’m not referring just to Greece’s fabled mismanagement of its economy. Germany in particular has been foolish (and hypocritical) in handling the crisis. Economists didn’t agree on what would have happened after a “Grexit” (Greece abandoning the euro to restore a currency of its own), other than sharing a fear of potentially devastating consequences. But trawling for experts’ views permits a primer.

1. There’s plenty of blame for the crisis. Greece 6 years ago had an unsustainably bloated public sector, big deficits and a cellar-level ranking among nations for being friendly to new business. No one believes all has been fixed, and broken Greek promises from previous bailouts have poisoned relations with the continent.

But the Greeks took big steps to heed creditors’ demand that it address those problems, paralyzing the nation in a 1930s rerun. A quarter of the workforce is unemployed, with the poor hammered hardest of all.

More austerity isn’t appropriate penance; it’s sadism, to the point that economists debate whether leaving the Eurozone, for all its unknowns, might be the lesser of two evils.

2. Austerity is not just unfair, it’s dumb. A big reason Greece’s government retrenchment hasn’t worked is that the austerity demanded by Europe cut economic growth just as or more deeply. No one Over There seems to have learned the lesson Franklin Roosevelt learned when he tried to balance the U.S. budget during the Great Depression: With private spending shaky, cutting back on government spending only worsened the slump.

There’s one way to be a budgetary Grinch and still grow the economy—by allowing your central bank an easy money policy. But that route is unavailable to the Greeks, who gave up their own currency and the ability to print more of it by joining the Eurozone.

Weakening Greece’s economy may also jeopardize Europe’s security against an increasingly belligerent Russia.

3. Did I mention that Germany is hypocritical? Within a decade of its defeat in World War II, the German economy was rescued with a halving of its debt by creditors. Indeed, that experience and all similar experiences offer history’s verdict: Greek-like debt crises can only be solved with write-downs. Postponing the inevitable only inflates the necessary write-down.

Greeks have suffered. But so too has the face that democracy shows the world.

The only happy news is that we likely won’t be sucked into this despair. Few private European banks hold Greek IOUs—would you?—with the lion’s share in the hands of European governments and the European Central Bank, so there’s a buffer against private bank failures. Greece’s puniness also helps; it has “an economy roughly the size of greater Miami.”

The Europeans are our friends, essential not just to the global economy but to our Western model of what democracies should aspire to be. When a reputable newspaper can write that the latest bailout reflects how Germany “offered Athens a choice between obeisance or destruction,” the Greeks have suffered. But so too has the face that democracy shows the world.