Dispelling Greek myths

The Greek economic crisis continues to test the political will of all involved. The country's budget deficit is €300 billion. It owes $75.5 billion, $64 billion, and $43.2 billion to French, Swiss, and German banks respectively. George Papandreou, the centre-left Prime Minister, has proposed public expenditure cuts and savings measures to reduce the budget deficit from 12.7 per cent of GDP — over four times the 3 per cent allowed by eurozone rules — to 8.7 per cent by 2011. Although the finance ministers of the European Union have approved the proposals, German financial institutions and public reactions are creating complications. Greece needs to refinance €20 billion of its debt by May 2010, but German banks refuse to buy any more Greek government bonds. Three German banks hold over €14 billion of Greek debt, and a fourth, although willing to assist over bonds, has ceased to invest in the country. Greece faces plummeting revenues as economic activity stalls, but may have to spend 15 per cent of revenues solely on debt-servicing in 2010.

 The German public, which has suffered austerity measures, is hostile to bailouts for a country that has exceeded its budget deficit limits greatly. Greece's reputation for corruption does not inspire confidence in other eurozone countries either.

While Mr. Papandreou's economic problems are very serious, the wider ramifications are equally important. On February 24, those hardest hit took to the streets in a 24-hour strike; there were some brief episodes of violence. A Member of Parliament also raised the temperature with reminders that Germany has not paid war reparations to Greece; other Greek politicians have been angered by lectures from German Chancellor Angela Merkel and Eurogroup chairman Jean-Claude Juncker to the effect that Greece must do its homework and that other Europeans must not pay for Athens' bad economic management. Most outsider perceptions, however, are mistaken in significant respects.

First, EU rules do not allow simple bailouts of states. Secondly, corruption is not confined to Greece; France and Germany have both had their high-level corruption scandals. Thirdly, the U.S. Federal Reserve Bank is investigating the investment bank Goldman Sachs for colluding with the previous Greek government — a conservative one — to conceal the budget deficit from EU monitors. The most level-headed analyses call for guaranteed EU loans combined with expansionary Greek policies to encourage investment. Such moves would be well received in Greece, but they should also be welcomed for reasserting the primacy of the political over the narrowly economic. HN