Isnin, 18 Jun 2012

Time to Say Danke

Everyone is worried that Greece will default on its national debt. That's really not news. By one estimate, since it gained its independence from the Ottomans in 1832, Greece has been in default or restructuring for half this period. The news is that this time, Germany is willing to bail it out.
Throughout the euro-zone crisis, it has become conventional wisdom to regard the Germans as narrow-minded, ungenerous and dogmatically wedded to prescriptions of austerity to treat Europe's problems. Those criticisms are vastly overstated. Consider that Germany is being asked to take its taxpayers' money--in a democracy--and use it to bail out a country like Greece, which is guilty of mismanagement, poor competitiveness and financial fraud. And it has said yes! In return for this, Germans are being called Nazis in Greek newspapers.
Germany was an organizer of and is by far the largest contributor to the European Financial Stability Facility, which totals a staggering 726 billion euros ($924 billion). That number will rise and, when combined with earlier funds and loans, Germany's share will easily exceed the country's total annual federal tax revenues. Imagine the U.S. being willing to guarantee more than $2 trillion to bail out Mexico.
We hear a lot about the German public's opposition to helping the Southern European countries. What's remarkable, given the scale of German aid, is how little opposition there is. This month, Parliament will easily ratify a number of these funding mechanisms as well as a new financial-transaction tax to pay for part of this. (The Germans have the old-fashioned, conservative view that if you spend money, you should pay your bills.) In late February, one of the bailout packages cleared the German Parliament in a 496-to-90 vote. The German government has also relaxed its once rigid opposition to a more aggressive monetary policy. Mario Draghi, head of the European Central Bank, would not have been able to provide cheap loans to Europe's banks--thus staving off a Lehman Brothers--like crisis--without German approval.
There is a lively political debate to be had about whether the U.S. needs austerity measures right now. (I would say no.) But Greece and the other weak euro-zone countries had few options. Markets had become unwilling to lend them money because of their ever rising debt loads. It was as a response to genuine market pressures that these governments began to get their budgets in order. The austerity programs place too little emphasis on growth, but had these nations wantonly spent money, their interest payments would have skyrocketed. Most important, the Germans have not emphasized austerity so much as structural reform--opening up labor markets, liberalizing sectors and dismantling protections. What economies like Greece really need is less austerity and more reform. The lesson of most debt crises is that countries that make these changes ultimately make themselves more competitive.
Southern Europe has a long way to go on that score. In terms of the ease of doing business, the World Bank ranks Italy and Greece last (30th and 31st) among high-income countries. The World Economic Forum ranks Greece and Italy 125th and 126th in flexibility of hiring and firing and 133rd and 140th (out of 142!) in the burden of government regulation. Tax collection is almost nonexistent in both countries, and corruption is rampant.
Largely thanks to European Union (read: German) subsidies, over the past 10 years, wages have risen dramatically in Southern Europe. Unit labor costs in Greece went up by 35% from 2000 to 2010. They went up 2% in Germany.
German leaders have said again and again that they are willing to bail out weak euro-zone countries. But they have asked for reform as a condition of that aid. German Chancellor Angela Merkel is opposed to a sweeping solution like eurobonds not because of their cost--Germany will end up paying more--but because they would take off pressure to reform. The only leverage Germany has with countries like Greece is that the money gets to them incrementally as they enact reforms.
Greece might yet have to default and quit the euro zone. Its competitiveness problem is simply too great and its political leadership too weak. But if it goes down this path, Greece will find that the markets will refuse to lend it money at reasonable rates unless it does pretty much the same things Germany is asking it to do. Life without Germany will mean a lot more austerity than life with Germany.

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