The Greek Tragedy Continues to Unfold


For the last few days European leaders have reaffirmed their commitment to the failed experiment that is the euro. Herman Van Rompuy, the European Council President, has said that the EU wants Greece to remain in the eurozone, a position reiterated by European Commission President Jose Barroso. In the UK the Deputy Prime Minister and Leader of the Liberal Democrats, Nick Clegg, has said that it would not be rational to support a Greek exit. Neither this rhetoric nor hints that the Greek government may already have made plans for a currency switch have reassured the markets. Yesterday the euro fell to a twenty-two month low against the dollar. While the elected and unelected officials of Europe continue to speak of a rescue plan that will keep Greece in the eurozone, outside of the political bubble analysts are predicting a Greek exit.

At Citi Group chief economist Willem Buiter has predicted that Greece will leave the euro within the year and that the new currency Greece uses will be severely devalued. Academics such as Nouriel Roubini, Hamish McRae, and Stergios Skaperdas have argued that not only is a Greek exit from the euro inevitable, but the sooner the exit the better.

For the many Europeans who are not unelected officials on six-figure salaries the attempted salvaging of Greek membership of the eurozone will make this exit more painful than it would have been if Greece had been let loose from the currency earlier. So much money has been poured into attempted bailouts that who will owe who what when the dust is settled is far from certain. Philip Booth of the London-based Institute of Economic Affairs highlighted some of these problems last week.

That European policy makers seem intent of keeping Greece in the eurozone while claiming that spending increases are indications of some sort of "austerity" is especially worrying. All across Europe the myth of austerity is taking hold. Almost every government in Europe has increased spending as a percentage of GDP. In countries like the UK, where the government claims to be implementing an austerity program, spending is nominally increasing, and it is only thanks to inflation that we are seeing modest reductions in government spending.

The only suggestion of realism coming out of Brussels comes from an as of yet unseen document obtained by Reuters which indicates that countries inside the eurozone have been instructed to make plans for a Greek exit. The document also suggests that a 50 billion euro package could be given to Greece to help ease the transition out of the euro. The Greek finance ministry has denied that these plans have been made.

This Greek tragedy has dragged on for far too long, and the final chorus is long overdue. The political posturing that we have seen will only make the inevitable exit worse. Unfortunately, it is the Europeans outside of the political class who will have to endure the austerity that follows.