by Joe Shea
August 17, 2011
WHAT CAN OBAMA DO?
DUMMERSTON, Vt. -- Last month, I had the opportunity to hear a talk by Maria Margaronis, who covers Europe with her husband, D.D. Guttenplan, for The Nation.
She was in Greece this spring, as protests over the crippling austerity that has been unleashed by that nation's ongoing financial crisis grew in size and intensity.
Margaronis said she was one of those people "who never read the financial pages and found them unbelievably boring. But over the past few years, I have come to see that the financial markets have encroached on our politics. It's hard to fight for change when your country has been taken over by the banks, and the credit rating agencies have immense power over your economy."
When it was discovered in late 2009 that the Greek government had lied about the extent of its budget deficit for years, the bond markets and credit rating agencies panicked, and the result is the severe austerity that the Greek people are now facing to pay off the debts incurred by decades of living off borrowed money.
In the old days, the government would have devalued the Greek currency, the drachma. But now that it has been a member of the European Union for three decades and uses the Euro as its currency, it can't do that anymore. Where Greece used to borrow money at 4 percent interest, it is now being charged 26 percent, Margaronis said.
The hope is that with a smaller and less corrupt public sector, a more competitive private sector, and a broader and more reliable tax base, Greece can ultimately become prosperous. But meeting the financial targets set by the lenders will be nearly impossible. By next year, Greek public debt will be 160 percent of the nation's gross domestic product.
In the short term, Margaronis said the changes are wrenching and the human toll of austerity is high. Wage earners and pensioners had their incomes cut by more than 30 percent in the past year, and the worst is yet to come.
"Real poverty has hit Athens, and it is widespread," she said. "It feels like the whole fabric of society is coming apart. Greeks are normally pretty cheerful people, but I never saw the kind of despair that I saw this spring."
Despite all of the positives the nation has - a strong shipping industry, a prosperous tourism industry, and robust public infrastructure among them - Margaronis said the nation will be forced to sell off many of its public assets to pay off its debts.
"There's a fire sale going on in Greece right now," she said, "because if the country doesn't meet its financial targets, the deal is off."
Margaronis said it has been easy for northern Europe to dismiss the Greek mess as something that is unique to Greece, a country with a bloated, corrupt public sector and systemic economic problems, except that other countries in the Euro zone - such as Spain, Portugal, Italy and Ireland - are not far away from Greece's predicament.
The problem, she said, was that the European Union constructed itself in a way where it never put in place a mechanism for a nation to default on its debts and leave the EU. That is why the fear of the Greek crisis spreading to other EU nations and triggering a financial collapse is so high.
"The imbalances between countries [in the Euro zone] is so great, the choice is either to integrate everything more tightly, or have everything fly apart," she said.
Unfortunately, it looks like the latter scenario is playing out.
European policy makers have struggled to solve Greece's debt crisis for more than a year with little success. Now Spain and Italy, two economies that are much bigger than Greece, are going through their own fiscal problems. The fear that Spain or Italy might head down the same path raises fears about the future of the Euro.
Like Greece, the financial markets and the European Central Bank (ECB) have been pressing Spain and Italy to make steep cuts in public spending. Like Greece, the interest rate on Spain and Italy's public debt has been steadily rising.
This week, the ECB started buying up Italian and Spanish bonds, and they ultimately may be on the hook for up to 850 billion euros.
The ECB could handle buying up debt from the smaller EU nations such as Greece, Portugal and Ireland. Spain and Italy might be tougher. For example, Italy has the world's eighth largest economy, and its public debt is about 1.8 trillion euros, or 120 percent of its national output. A Italian default would swamp the EU's financial resources.
These crises points out the central flaw of the Euro. The currency was designed during a time of economic growth. Few realized in the late 1990s that you can't create a one-size-fits-all currency without also creating an economic system that equalizes risk and reward across the European Union. By concentrating monetary policy in the ECB, while leaving fiscal policy to individual nations, an inherently unsustainable system was created.
Germany and France, the strongest EU economies, do not want to bail out the other EU economies that are in trouble. Save for a massive bailout by these two nations, the only ways out of this current mess might be to either cast out the weaker nations of the EU, or drop the idea of having a single currency and allow national currencies to find their natural levels against each other.
Another solution might be to integrate the EU more tightly, and coordinate fiscal and monetary policy at the Continent level. This would create the financial equivalent of a United States of Europe.
Unfortunately, the idea of a United States of Europe, where stronger nations backstop the economies of smaller nations, doesn't exist. It is hard to imagine the EU's members going along.
For all the concern about Standard & Poor's downgrade of the United States' debt rating, it is the financial turmoil in Europe that is fueling the panic on the U.S. financial markets. It's hard to imagine the collapse of the Euro, but unless something is done, it may happen.
AR Chief Correspondent Randolph T. Holhut has been a journalist in New England for more than 30 years. He edited "The George Seldes Reader" (Barricade Books). He can be reached at firstname.lastname@example.org.