Monday, July 6, 2015

Greece voted no, but the damage was already done

By Ian Verrender Mon 6 July 2015

Greek flag outside bank Photo: The austerity program imposed upon Greece has been a disaster. (AFP: Aris Messinis)

Greece may be on track for a resounding rejection of tough bailout conditions from its creditors, but the truth is the European Union sowed the seeds for its own destruction regardless of this outcome, writes Ian Verrender.

It was after the Battle of Asculum in 279BC that the legendary Greek military leader Pyrrhus, surveying the fields littered with death and devastation, uttered his now famous line.

"If we are victorious in one more battle with the Romans, we shall be utterly ruined," he said. Hence the term, pyrrhic victory.

More than 2000 years later, the boot is on the other foot.

Having forced Greece beyond the point of bankruptcy with an austerity program primarily designed to inflict pain rather than restore the beleaguered debtor's finances, the European Union has sown the seeds for its own destruction regardless of the resounding "no" vote in this weekend's referendum.

It is indeed a bizarre thing to watch the Frankfurt based European Central Bank - which has a primary mandate to ensure economic stability - force the closure of Greek banks and watch on as capital controls are imposed and ordinary citizens struggle to survive.

Greece is hopelessly uncompetitive - thanks largely to the euro - and is wallowing in debt that can never be repaid with a quarter of the workforce unemployed.

That was obvious in 2010 when the crisis first reared its head, and again in 2012 when the situation worsened and Greece technically defaulted.

Back then it was granted some relief courtesy of the biggest debt restructuring in history. But it was too little, too late and even immediately afterwards, it was clear that European leaders had chosen merely to delay the inevitable rather than face the problem head on. That day has arrived.

The austerity program imposed upon Greece has been a disaster. It has caused years of recession that has pushed its debt to GDP ratio from an already stonking 120 per cent to a now dizzying 180 per cent.

Most economists, and political analysts for that matter, view the unfolding crisis through the same prism; a short-sighted perspective concerned almost exclusively with financial market fallout if Greece is expelled from the Eurozone and the single currency.

There is no doubt that could be tumultuous in the short term, given a formal default would be the biggest sovereign default in history.

But the longer term issue is the political impact, not just on Greece but across Europe. Tolerance is in short supply and the political shift in Greece has been to the extremes, including the worrying rise of the neo Nazi party, Golden Dawn.

That has been mirrored across the continent, including in France where Marine Le Pen's National Front has now become the nation's third biggest political party.

This week is likely to be a pivotal moment in global history. The divisions and mistrust that for centuries have regularly plunged the European tribes into war once again have begun to bubble as old wounds now are reopened.

Unless a permanent solution to the Greek crisis is found - by writing off its debt and instituting measures to restore growth - the fallout could result in a regional and global shift in political alliances along with far reaching economic costs.

Rather than debating how to fix the problem, the situation instead has degenerated into who is to blame.

There is no denying the rampant corruption that has eaten away at the heart of the Greek economy, the bloated public sector that has stilted growth and the mismanagement that has brought the nation to its knees.

But this was all evident long before it joined the Eurozone. That Greece enlisted the services of Goldman Sachs to hide billions in public borrowings so that it could limbo dance its way under the debt bar only serves to highlight the lack of oversight of the EU and the European Central Bank.

From the moment Greece joined the Eurozone, gleeful German and French banks plied the country with debt, safe in the knowledge that, as a member, all loans would be underwritten by Frankfurt.

Its external debts began to mount. The genesis of the Greek debt crisis, however, lies not in Athens but in the very structure that is the European Union.

Unlike America or Australia, the EU is not a real federation. The nations tied by the single currency - the Eurozone members - labour under the monetary regime of the European Central Bank. But they have independent fiscal regimes and politically are independent.

That sounds fine in principle. In practice, it simply doesn't work. While our state premiers bicker and feud and occasionally hint secession, the underlying principles of our federation are to ensure equality across the Commonwealth.

Generous payments from wealthy states make their way to less well off states. Nobody seriously argues otherwise. No Australian politician would treat a less well off state in the Commonwealth the way Germany is treating Greece right now.

Our recent experience of the resources boom, where a strong currency obliterated industry and hollowed out eastern states manufacturing, hints at the deeper economic malaise caused by the single European currency.

The strong nations in northern Europe have been huge beneficiaries of the union. But the poorer nations, such as Greece, Portugal and Spain, have been made materially worse off.

Why? Well, the single currency represents the overall performance of those nations in the union.

That means it has been too strong for the weak nations, rendering them uncompetitive on global markets. Their weak economic performance, on the other hand, has dragged the euro's value lower than Germany's mark ever would have been.

So the rich nations have benefitted, particularly as the economies of Greece, Italy, Spain and Portugal have declined.

That simple piece of economic logic has been conveniently forgotten as the tide of bitterness swells and German, Austrian and French politicians refuse to countenance anything other than repayment.

They all know Greece cannot pay. But as they push for political victory over economic common sense they would do well to remember the words of Pyrrhus.

Ian Verrender is the ABC's business editor.

Greece voted no, but the damage was already done - The Drum (Australian Broadcasting Corporation)