Greece and Europe may be nearing divorce. Following the recent Greek election where a new government was elected on an anti-austerity platform, an attempt to renegotiate the Greek Debt under the supervision of the so-called Troika (EU, Euro Zone and IMF) has, so far been inconclusive. The final agreement (or non-agreement) will be decided upon in the next few months. Some see these negotiations as a standard win-lose game: either Europe 'wins' and Greece 'loses' or vice versa. In this post, I argue that the real choice is between 'win-win' for both or 'lose-lose'. In developing my arguments, I must acknowledge my intellectual debt to a colleague and friend John Evdokias, for his perceptive insights. Argument 1: The Debt Issue Is Surprisingly Insignificant The debt issue, blown out of proportion by professional alarmists, is actually relatively trivial for many reasons. First the debt itself is small by global standards. 315 billion euros appears high, for you and for me but is small in the European and world economy. It can be managed. What is much more problematic is Greece's capacity to repay it, quickly, given current conditions. The debt is now 175 percent of GDP. To ask for quick repayment is like asking an unemployed worker to immediately reimburse his mortgage. Not possible. Second, since the debt is held not by the Mafia but by supposedly 'friendly' institutions, including the European Central Bank and the IMF, what should be at issue are convivial repayment modalities not the principle of repayment. These modalities involve (a) the date of maturity and (b) the rate of interest. Concerning the date of maturity, it may surprise the reader to discover that long term loans (some going to one hundred years) are increasing in popularity. At one point Disney Corporation obtained such a loan and as Evdokias pointed out "if a Mickey Mouse company can get such a loan, why not Greece". Some countries allow 100 year mortgages and some companies issue 100 year bonds. So, the option of a long term repayment of the Greek Debt would not be absurd. As far as the rate of interest is concerned, as we all know, we live in a period of very low rates and, in some cases actually negative. What that means is that lenders are now paying to lend, an aberration a few years ago but now more and more frequent. With that backdrop, a Greece-Europe divorce based on disagreement on debt repayment would be ridiculous. That's not how things are settled between members of the same family. Argument 2: Greece's Exit From the Eurozone Would Be Very Dangerous for Both Parties The 19 country Eurozone with a common currency, the euro, was designed as a work in progress A withdrawal from the Euro Zone and the adoption of a new national currency, may well offer short term benefits for Greece since, the new drachma will, most likely, be devalued thus making exports more competitive. But how long will that benefit last ? The strategy of devaluation works if one country devalues and not others. In the 1930s Western countries, faced with depression and mass unemployment, resorted to competitive devaluations, which cancelled each other out. As a result everyone lost. Furthermore, Grexit as it is called, may not be an isolated phenomenon. If successful, other countries may be tempted to follow suit, including Spain, Italy, France and even Germany. Grexit could be the first step to a break-up of the entire euro zone. It is very easy to destroy something and much more difficult to build it up. The negative momentum which this would entail over time, would be disastrous for the Old Continent and put the entire European Project in grave jeopardy. Argument 3: Beyond Economics, Serious Geopolitical Dangers Lurk for Both Parties If Greece decided to stay in the Euro Zone under humiliating conditions this would not be the end of the matter. Right now, the Syriza Government is the last bastion for left of center 'respectable' parties. If Syriza fails, then much more extreme and less 'respectable' parties from the far left and the far right, may be elected with ominous consequences. Greece will then be vulnerable to serious social upheaval. As socio-economic conditions deteriorate that upheaval may lead to armed violence, including a potential civil war. It must not be forgotten that Greece went through a particularly bloody civil, on class lines after the end of World War II where the extreme left opposed the extreme right. The scars are still there. Not only would an unstable and weakened Greece be bad news for itself, it would also be very bad news for the entire European Union. Beyond economics, Europe faces three additional threats. One comes from a newly aggressive Russia, seeking to reverse the demise of the Soviet Union and probably eager to obtain a geopolitical pied a terre in Greece. A second one comes from the disruptive ambitions of ISIS and radical jihadi terrorism. A third one comes from the disaffected euro-skeptics, all over the Continent, some advocating a departure from the European Union itself and others, promoting separatist movements ready to break up existing countries. The resulting balkanization of Europe would be bad, not only for this continent but for the world, because the European integration experiment which was started after the Second World War was initially seen as a model for better global integration. It could still serve as such a model, once it is restructured, perhaps even reinvented. To give all this up for a mere question of debt, in a world drowning in excess capital would be to show unbelievable myopia and even masochism. The Greece-Europe marriage can and must be saved. A reasonable accommodation is quite possible because of the win-win vs. lose-lose potential. As self appointed 'marriage counselor' my recommendations for this accommodation, in a subsequent post.
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