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Jean-Claude Trichet, ECB president, at the Eurogroup meeting, Luxembourg, June 20, 2011
Dr. Peter Morici: Greece does not have a liquidity problem - -
it is insolvent. Without transfers of wealth from richer states like Germany and
France to retire significant amounts of its sovereign debt, Athens must
restructure its bonds—essentially default on significant portions of its
obligations to bondholders.
Germany and France are at wits’ ends, because their
banks hold a good deal of that debt and would take big losses, and other poor EU
governments would likely follow Greece’s lead. Paying off Greek creditors may be
distasteful, but covering the problems of all the EU governments in trouble is
beyond the capacity of Germany and the other richer EU states.
To patch things over for another year, Berlin and
other rich governments want Athens to impose more cuts in government benefits
and wages in exchange for more loans and relatively small private creditor
haircuts. And they want Athens to sell off valuable state-owned assets to help
lubricate the deal.
The Greek people have already taken major cuts in
benefits and salaries, and they understand gradualism is not solving the
problem. They shouldn’t want their economy bought up by the Germans and others,
and they are correct to expect their government to consider other, more
The amount of aid the Greek government will receive
through current negotiations will likely result in another crisis next year or
the year after, and then more cuts in benefits and wages. Importantly, these
deals do nothing about private debt—the mortgages, auto loans, and credit card
balances Greek citizens are expected to pay as their salaries are cut and cut.
As European integration progressed - - for example,
with the 1992 Maastricht Treaty that harmonized taxes and product standards, and
the 1999 introduction of the euro - - European voters in poorer states
increasingly expected health care, job security and retirement benefits on a par
with the richer states. Civil servants expected to be more adequately
compensated—yes “adequately” because examination of Greek salaries does not
reveal payments that are very generous by German or French standards.
Sadly, these efforts at deeper market
integration did not give Brussels the power to tax richer Germany to subsidize
Greek social services in the way that Washington taxes New York to subsidize
health care and retirement benefits in Mississippi.
Over the decades, poorer countries
have borrowed too much to keep up, and now without continuous EU bailouts, they
will default on their debts.
Prior to the euro, as poorer countries
approached such crises they could let their individual currencies fall in value
against the German mark to make their exports more competitive, grow more
rapidly and boost debt payment capacity. It meant retirees and tourists from
Germany and other rich countries could more easily afford to live in or visit
poorer countries than the reverse - - a small price to pay for keeping the ship
of state from capsizing.
When countries are broke and locked
into the same currency area with their major export customers - - presently the
condition of Portugal, Ireland, Greece, Spain, and Belgium— their only option is
deflation—cuts in government spending, wages and ultimately prices that make
their exports more competitive and boost debt service capacity.
Essentially, this is what Germany is
imposing on Greece, but citizens have mortgages and other debts to pay just as
the government have bonds to service. Deflation makes private debt nearly
impossible to honor, and many Greeks will lose their homes and just about
everything else to foreign creditors before the madness ends.
The only real option is to drop the
euro and resurrect the drachma, unilaterally remark public and private debt into
drachma, and let the drachma float to a value on currency markets that balances
Greece’s export revenues against its imports and debt servicing obligations.
Abandoning the euro for the drachma
would cause Greek GDP and debt servicing capacity to grow more rapidly. Whatever
losses imposed on private creditors, richer EU governments and Greek citizens,
those would be smaller than the total losses imposed through an annual ritual of
crises, aid packages and debt rollovers - - conditioned on ever more draconian
austerity—and the ultimate absolute default when the final charade ends.
What If Greece Left the Euro? Is it time for Greece to dump the euro and return to the drachma, with Peter Morici, University Of Maryland business professor; Pedro da Costa, Reuters economic correspondent and CNBC's Michelle Caruso-Cabrera:
Professor, Robert H. Smith School of Business, University of Maryland,