Pericles, ancient Greek statesman, gloated in the 5th century BC that Greece, a fledgling democracy, did “not follow the customs of our neighbours; we are rather an example to them than they to us”.
How times changed. For most of Greece’s modern history, it has been a basket case: a vassal of the Ottomans for centuries, then a protected monarchy, a dictatorship, and now a bankrupt democracy. Having enriched civilisation with a magnificent legacy, Greece degenerated.
A Greek sovereign default would hardly be novel. In 1826 Greece defaulted and was shut out of international debt markets for 53 years. It limped along until 1931, when it defaulted again.
Greece’s extant travails should offer no more than passing interest for the world’s taxpayers. After all, the Greek people are reaping what they have sown. Greece is a democracy, with compulsory voting and a universal franchise. Evidently, no Greek politician has successfully dissuaded his people from supporting reckless governments.
Past Greek defaults, when Greece was relatively a much larger economy, did not spark economic Armageddon. Yet now we are supposed to believe that Greece, a country with an economy about the size of Victoria’s, will spark financial catastrophe if it defaults on its few hundred billion dollars worth of loans. I am yet to hear how many people will be killed.
It is a ridiculous claim, and one fanned quite rationally by large international banks, who want taxpayers to absorb as much of their losses as possible.
European banks, Greece’s biggest creditors, have capital significantly in excess of their exposure to Greek debt. It is not unreasonable to argue that, in a worst-case scenario, all their substantial profits (the three biggest French banks alone made profits of about €16 billion in 2010, for instance) should go instead to writing off their bad loans.
That banks lose money on bad loans is surely the fair and efficient outcome for what is (comically) supposed to be the free-market West. Greece’s creditors have lent in full knowledge of its poor credit history and reckless public spending. Greece has broken the European Growth and Stability Pact continually for a decade. The banks have enjoyed higher interest rates to compensate them.
It is morally repugnant that ordinary taxpayers around the world are forced, at great cost, to keep Greece solvent in order to prevent banks from losing money. Last year the IMF and the EU lent €110 billion to Greece. Incredibly, another package of similar size is planned.
This money only prolongs Greece’s pain, encourages other countries to borrow excessively and creditors to lend unwisely, and risks being lost forever to the ordinary taxpayers who earned it.
If indeed the financial system cannot withstand the default of a piddling country, then it is woefully undercapitalised and a public menace. Yet regulators say the financial system is stable, and capital ratios need only be tweaked a little by 2019. Which is it?
I hope the latest round of “austerity measures” do not pass the Greek Parliament today. Greece would be wiser to default, perhaps even engineer a devaluation by leaving the euro zone. It would then face a balanced budget rule with teeth: no one would lend to Greece but at least it would be forced to live within its means. Living within one’s means is not austerity, it is prudence.
A painful period in the fiscal wilderness might even cure Greeks’ fiscal naivete and strengthen the country for the long-term, much as Germany’s searing inflations in the early 2oth century did for it.
The Achilles’ heel of democracy is rampant, myopic spending. So it is ironic that Greece, long feted for its ancient democratic embrace, is today a harbinger of fiscal crises to come.
Portugal, Italy and Spain have equally onerous debts and look set to follow Greece’s path sooner rather than later. Remember only two years ago credit rating agencies gave Greece an A rating! The United States and the United Kingdom are running budget deficits of similar magnitude to Greece’s. As in Pericles’ time, Greece continues to be a trendsetter.