Near Miss For Greece, Near Miss For The EU?

What has been going on in the country of Greece, as well as the other member countries of the European Union (EU) lately? In a story that many in the United States can relate to, the country of Greece has gone on a deficit funded spending spree under the assumption that it would always be able to meet the debt service obligations. This assumption has proven to be wrong, and this country whose economy places it on the bottom rung of the EU ladder, faces a sovereign default unless the other EU countries bail it out. This crisis in Greece comes at a time when all of the economies in this group struggle.

Greece currently has a budget deficit that is approximately 13% of GDP, with a debt load that is 120% of GDP. These levels, as the current situation shows, are not sustainable.

EU Member Bailout

The global financial markets were calmed on Thursday when reports said that an agreement had been reached by the member nations of the EU to bailout Greece to avoid a default on debt that would impact the whole of this alliance. Details at the time were not released, as these details may very well not have been determined yet.

Different members of the EU have differing thoughts on the timing of any bailout, as well as the need for any bailout. Other EU members, such as Spain and Portugal, have their own debt burden issues. Countries like Germany will have to sell the bailout of another sovereign nation to the people, as this was not the idea envisioned when the Union was formed.

What Might The Real Bottom Line Be For Greece and the EU?

The countries of the EU may or may not take steps to thwart off a default by Greece, but in an analysis by Albert Edwards of Société Générale, the fate of the EU has already been sealed. Here is an excerpt:

“My own view of developments, for what it is worth, is that any "help" given to Greece merely delays the inevitable break-up of the eurozone. But, for me, the problem is not the size of the government deficit and the solvency or otherwise of the governments in the PIGS (Portugal, Ireland, Greece and Spain - we deliberately exclude Italy).

The problem for the PIGS is that years of inappropriately low interest rates resulted in overheating and rapid inflation, even though interest rates might well have been appropriate for the eurozone as a whole. Rapid inflation has led to overvalued bilateral real exchange rates (they do still notionally exist) for the PIGS and in most cases yawning double-digit current account deficits. With most trade done with other eurozone countries, the root problem for the PIGS is lack of competitiveness within the eurozone – an inevitable consequence of the one size fits all interest rate policy. Even if the PIGS governments could slash their fiscal deficits, as Ireland is attempting, to maintain credibility with the markets in the short term, the lack of competitiveness within the eurozone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Hence the PIGS public sector deficit will inevitably remain large as a direct consequence of this weak growth outlook.

In my opinion this will not be tolerated by the electorates in these countries. Unlike Japan or the US, Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain. Consigning the PIGS to a prolonged period of deflation is most likely to impose too severe a test on these nations. And the political "consensus" within the PIGS to remain in the eurozone could falter in the face of another of Europe's unfortunate tendencies -the emergence of small extreme parties to take advantage of any unrest. My own view is that there is little "help" that can be offered by the other eurozone nations other than temporary confidence-giving "sticking plasters" before the ultimate denouement: the break-up of the eurozone…”

These are not reassuring thoughts for the future, not only for Greece and the EU, but for the global economy!