Greek tragedy

by Hans-Werner Sinn

Vox
July 26, 2011

The Eurozone crisis is far from over. Greece still needs substantial reforms if it is to regain competitiveness and survive without support. This column argues that the pain of doing so will be unbearable for Greek society. It claims that the best solution for all concerned is if Greece temporarily leaves the euro.

The European monetary union is stuck in a severe balance of payments crisis. Capital flight from Ireland and the huge current-account deficits of Greece, Portugal and, partly, Spain were financed in the past three years with money printing by the ECB to the tune of more than €100 billion per year, as I reported several times. But the well is running dry for the ECB, prompting it to push the euro members to provide credit. The French banks, which had by far the largest exposure to Greek debt, have been doing their best to unload Greek sovereign debt on the Eurozone countries. And they have been successful. As a result of their pressure, a €110 billion rescue package for Greece was agreed one year ago.

Now the intention is to safeguard the Greek living standard and to help the Greek creditors even further. No less than €120 billion are to be provided until 2014 to secure redeeming of sovereign bonds maturing in the coming three years. It is assumed that around €100 billion in Greek sovereign bonds will have to be returned to the creditors until that time. Fifty billion euros are to be made available by the European taxpayers in the form of fresh credit. Of this sum, €30 billion will be used for direct payments to creditors, and €20 billion will go into an investment fund that purchases AAA-rated sovereign bonds from other countries. The remaining €50 billion will not be redeemed but will be reinvested by the banks in 30-year Greek government bonds. The AAA-rated investment fund serves the purpose of securing in increasing proportions the €50 billion over time, since compound interest will eventually turn the €20 billion into €50 billion. Even if a risk remains in the meantime, which irritates the rating agencies no end, this is a model sure to produce windfall profits for the bank system with taxpayer money, since Greece has been bankrupt for a year already.

Much worse, however, is the fact that Greece has lost its competitiveness. Its government took on massive debt under the euro, inflating Greek wages and prices. Greece’s current-account deficit reached 10.5% of GDP in 2010. Aggregate consumption exceeded national income by 16.5%.

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