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Sunday, May 9, 2010

Will the euro live through the Greek crisis?


LONDON — The British, who have not joined the single European currency, have watched somewhat complacently the development of the economic crisis in Greece. They have been happy to leave Greece's rescue to the other countries that use the euro and to the International Monetary Fund.

The 110 billion euro package, recently announced and accepted by the Greek government should be enough to keep the Greek economy going for the present, but observers fear it will not prove adequate in the long run and that the Greek government may not be able to withstand the social unrest to enforce austerity measures that organizers of the bailout have demanded. The crisis has raised fundamental questions about the viability of the single currency. Can a single currency be sustained without the coordination of fiscal-monetary policies?

Although the United States has a single currency with significant powers delegated to the states, fiscal and monetary policy rests with the federal government. States and districts can borrow and default without taking the whole system down.

In Europe fiscal policies are the responsibility of member states bound by the stability and growth pact they signed, but sanctions provided under the pact have proved inadequate. Larger states have shown a willingness to ignore inconvenient rules and this has made it easier for those with weaker economies to follow suit.

The lesson seems to be that to make the single currency work effectively, moves will have to be made toward greater political union in Europe, especially in the eurozone. This could lead to a two-speed Europe — divided between countries that use the euro and those that don't. Countries in the eurozone will probably have to accept not only common fiscal and taxation policies but also effective enforcement. This implies closer coordination of criminal justice.

The Greek economic crisis is likely to make it more difficult for European countries not already in the eurozone to adopt the common currency. Conditions for joining will surely become more stringent and probably less palatable. Only the stronger economies that keep corruption under control and where taxes are duly paid would be allowed to join.

Another consequence may be the development of rules allowing for a eurozone country to be expelled or to opt out of the single currency. At present there are no such provisions; a major renegotiation would be needed before Greece could pull out of the euro and re-establish its old drachma currency. This would be hugely complicated and expensive, but perhaps only by re-establishing the drachma can Greece devalue its currency to improve its competitiveness.

If Greece's sovereign debts in euros were redenominated in a devaluing drachma, this would mean that Greece would default on its sovereign debt, which could have serious implications for the national debts of other eurozone countries with high debt ratios and high unemployment such as Portugal, Spain and even Italy. There could be a domino effect and the credit rating of other European countries, including the United Kingdom, could eventually be downgraded. This could be serious blow to world economic recovery.

The Greeks seem to have been living in "cloud cuckoo land" for too long. The public sector has been allowed to grow too big and current levels of wages and perks have become unaffordable. Greeks have been allowed to retire at too young an age even as life expectancy lengthens.

But while these factors have had serious consequences for Greece's ability to service its public debts, the more serious aspects of the Greek economic crisis appear to be the failure of wealthy Greeks to pay their taxes, widespread corruption in public life and a huge black economy. No one likes to have to take a pay cut or lose their perks, and popular Greek opposition to the government's austerity program is understandable.

People ask why they should suffer when the richer, better connected and more corrupt are able to salt away their untaxed riches abroad. The Greek government, if it is to make the austerity program work, must show that it is determined to force tax dodgers to pay up and must take resolute measures to root out corruption.

Some observers are understandably skeptical about the ability and stamina of the Greek government to force through the unpopular measures needed and fear that Greece will soon need a further bailout or accept national bankruptcy.

The German government, one of the central pillars of the eurozone, and German banks have been accused of responding too slowly to the Greek crisis. Germans, who seem to have a stronger work ethic than many Greeks, are fiercely critical of aid to the Greeks whom they regard as spoiled by perks, early retirement provisions and general "feather-bedding" welfare.

The picture drawn by the media of the Greek economy may well be unfair and exaggerated, but Greece would not be in the position it is now if it had not borrowed such large sums to pay for current expenditures and for lifestyles that the Greek economy alone cannot sustain.

The single currency faces a very testing time and it is not yet clear how serious the damage to the single currency will be from the Greek crisis.

Still, the crisis should not be allowed to obscure the real advantages in terms of increased trade and simpler payment arrangements that the single currency has brought about.

Hugh Cortazzi, a former British career diplomat, served as ambassador to Japan from 1980 to 1984.


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