No, no, 350 billion times no, say Greeks

Endemic structural flaws underpinning the European Union are partly to blame for Greece’s economic woes, writes Karen Kissane in London.

THE Greeks have a national holiday for saying “No!” On October 28, they celebrate the anniversary of a day in 1940 when their prime minister rejected a demand by Mussolini that Axis troops cross into Greece.
Legend has it that despite knowing it would mean war, he simply said “Ohi!” (pronounced o-hee). Greeks who had heard the story then poured into the streets shouting “Ohi!” in solidarity. The Italians did invade but were eventually driven out.
For weeks now, angry crowds outside Greece’s parliament have called on that history of patriotic resistance, waving banners that again proclaim “Ohi!” This time, the “enemy” is their government’s austerity program and it is not yet clear if the people will win.
The rest of Europe hopes not. Greece owes €350 billion ($A473 billion) — more than 1 times the country’s annual output. It cannot afford to pay even the interest on those debts. Since May last year the European Union, the European Central Bank and the International Monetary Fund have been bailing Greece out with a €110 billion loan and are now considering a second one.
In return, this “troika” insists that Greece balance its books.
For years, Greek governments have spent more than they earn. The country’s leaky and unfair tax system — which captures ordinary wage earners but lets many self-employed and big-business people off the hook — did not bring in enough money to pay for its large public sector and its welfare programs.
Greece is now stigmatised as the potential cause of a euro-zone collapse. If it defaults and chooses bankruptcy, this might frighten investors who are already anxious about the financial problems of Portugal, Ireland and Spain, who, together with Greece, are now known by the graceless acronym “PIGS”. This could cause “contagion” — fear spreading through markets — triggering a credit freeze that sucks the rest of the euro zone or even the rest of the world into recession.
But the cause of Greece’s catastrophe does not lie entirely with Greece. Underlying faults in the structure of the European Union allowed the debacle to develop.
Greek analyst Petros Papaconstantinou asked in the newspaper Kathimerini: “If . . . little Greece is capable of causing such contagion throughout Europe, couldn’t the problem lie with Europe’s immune system?”
The European Union is a giant experiment, magnificently idealistic but flawed.
The euro zone has a single currency for countries with widely differing levels of wealth, frugality and financial nous. Interest rates were kept low by the European Central Bank to prevent deflation in wealthier countries but the easy credit seduced “PIGS” nations.
The EU then proved to have poor systems for supervising member countries’ national accounts and for regulating the levels of capitalisation of European banks, which run on lower deposit ratios than American banks. It also failed to recognise the danger of fearsomely large bubbles in places such as Ireland and Greece.
The EU was set up on the understanding that no member would be required to prop up another. But in most nation-states with a single currency — such as Australia or the US — poorer areas are given a boost through higher per-head funding or projects that bring work to a place with less employment. The EU has a couple of ways of doing this, but they are relatively low key.
Nation-states also have a national debt for which the entity as a whole takes responsibility. The EU does not.
The EU has tried to have an economic zone that is united in some regards (over currency and interest rates) but fragmented: countries are free to decide their own tax and spending targets and run up their own debts.
“The perception was that the euro zone was rather like living in a neighbourhood with individual houses and individual gardens,” says Thomas Klau of the European Council on Foreign Relations. “You want all the houses and gardens to look nice, but ultimately everyone has a responsibility for his or her own building.
“It’s more like an apartment building. When there’s a flood or a fire in one of the flats, everyone is affected.”
This is why some analysts now talk of the EU either becoming more integrated or fracturing entirely. It could decide to develop closer ties over money to stabilise the zone, or Germany might finally buck up over endless bailouts. Greece might decide that default could not be any more painful than its current suffering. Everything old will be new again, in a Europe with Deutschmarks and drachmas.
It is now seen as inevitable that Greece will default at some point and further bailouts are viewed as ways of buying time: for Greece to get back in the black before it has to manage on its own; for Ireland, Spain and Portugal to become stronger; and for Europe’s banks to regain their balance.
Spain has its “indignants” protesting against austerity. The Irish complain their debt repayments are strangling any chance of recovery. This week, 500,000 Britons took to the streets to oppose cuts to pension plans.
Greeks are not the only ones shouting “No!”

First published in The Age.