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Greek Street

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The Times has a pretty good rundown on Wall Street’s complicity in Greece’s current budget woes. The European Union has rather strict rules on the size of the deficit its member countries are allowed to have; but Greece, it turns out, has been under-reporting its deficit for nearly a decade. I wonder where they learned to cook their books?

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

Oh.

We’re going to hear a lot in the coming weeks about Greece’s irresponsibility and how Wall Street callously enabled them like a heroin dealer that profits from a junkie’s weakness. And while these accusations are no doubt true, they miss the real point of the Greek debt story, which has to do with the paradox on which the European Union is founded. In fact, a crisis like this was bound to happen. Greece’s and Wall Street’s malfeasance are inexcusable, and certainly no one should try to absolve them from blame on this, but we have to ask ourselves: how long did Europe expect this partnership to last?

At the heart of the EU’s troubles lie the fundamental disparities between its member economies. Germany, as we all know, is an economic powerhouse, and produces the lion’s share of the EU’s GDP. France does well for itself, as do Austria, Sweden, Switzerland and a host of other countries. But the countries that aren’t doing so well: Greece, yes, but also Italy, Portugal, Ireland, and Spain are all  in a difficult and ultimately insoluble position.

Their economic fortunes entwined with that of the rest of Europe, they find themselves under enormous pressure to report spectacular economic growth. If unable to do so, their troubles extend to the other member countries, and, most importantly, cast aspersions upon the value of their shared currency – the Euro. So the incentive to fudge the numbers is tremendous.

The paradox of “Eurozone” (zone of countries that use the Euro) directly stems from this. Put simply, no country can leave the Eurozone after it joins, and at the same time, every Eurozone member has to post annual growth without fail. The Greek situation is a perfect illustration of this, but the point is that it could have happened (in fact, probably will happen) to several EU countries. Greece just happened to be the scapegoat because it had the biggest debt.

This handy chart from Der Spiegel should nicely demonstrate this point.

Even Germany and France, the so-called “EU powerhouses”, are technically breaking their own debt rules. But why doesn’t Greece just divest itself from the Euro, say it was too hasty in joining, and maybe re-apply for admission in a few years once it gets its economy under control? Well, it could do this  – and likely would, if France and Germany had their say – but such a move would precipitate a run on Greece’s banks, sink its economy, and leave it a European pariah for at least a generation. Think about it: if you had a bank account in a Greek bank in Euros, and the Greek Premier announces one day that your account will be transformed into Greek Drachmas on such-and-such a date, what would you do? Obviously you would liquidate your holdings and invest in some more stable Eurozone country. Germany, perhaps?

But at the same time, Greece’s economic situation is causing near-panic among investors and ravaging the Euro. The Euro’s value has dropped more than 9% in just two months. And therein lies the paradox. By staying in the Eurozone, Greece threatens the whole enterprise. By leaving, it dooms itself to economic collapse.

A recent interview with the EU Central Bank chief economist Jurgen Stark displays the confusion now embroiling the EU. It’s clear that no one knows what to do about this. For the time being, I suppose, Germany or France will have to pony up the cash to bail Greece out, but this does nothing but delay the central problem described above.

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Written by pavanvan

February 14, 2010 at 4:02 pm

2 Responses

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  1. There’s lies, damn lies, then there’s budgets and the worst: budget statistics. Not only will this lead to a zip effect to bring down one nation by sovereign default after another, but esp. in the case of little Greece it was unnecessary to step in for the European Union.

    crisismaven

    February 15, 2010 at 12:56 am

  2. […] leave a comment » The Wall Street Journal reports today that Greece will get a $41 Billion “financing” package from Germany and France, who, I hasten to point out, aren’t exactly swimming in liquidity themselves. […]


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