Op-Ed Contributors
Ode on a Grecian urn on fire that exposes a slew of lies
By Hans-Werner Sinn (China Daily)
Updated: 2010-02-26 07:48
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The euro's current weakness has one culprit: Greece. At 14 percent of GDP, Greece's latest current account deficit was the largest among euro-zone countries after Cyprus. Its debt-to-GDP ratio stood at 113 percent by the end of 2009. Since this year's deficit is projected to be more than 12 percent of a shrinking GDP, the debt-to-GDP ratio will soar above 125 percent by the end of 2010, the highest in the euro zone.
Investors reacted by trying to get out of the euro and, in particular, steer clear of the Greek government's debt. Greece has had to offer them increasingly higher interest rates to stay put. In January, the interest premium was 2.73 percentage points relative to German public debt. If this premium prevails, Greece will have to pay 7.4 billion more in interest per year on its 271 billion debt than it would accumulate at the German rate.
The problem is not only the premium itself, but the imminent risk that Greece will not be able to find the 53 billion it needs to service its debt falling due in 2010, let alone the estimated additional 30 billion to finance the new debt resulting from its projected budget deficit.
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That figure, we now know, had no basis in reality. After euro banknotes with Greek motifs had already been printed and distributed, Eurostat, EU's statistics agency, reported that Greece's deficit had actually been 3.3 percent of GDP in 1999. The revised number was overly generous, too, and Eurostat later withdrew it.
Today, no official figure on the budget deficit in 1999, the year on which the EU based its decision about Greece's entry, is available. Reports issued by Greece in 2009 were similarly misleading, jumping from 5 percent to 12.7 percent of GDP when Eurostat had a closer look.
Indeed, the official figures were so unreliable that Eurostat was forced to express "reservation on the data reported by Greece due to significant uncertainties over the figures notified by the Greek statistical authorities" - a stiff rebuke in bureaucratic language. So what Greece got exactly is what it sought to avoid with its dodgy data: the rise in interest-rate spreads for Greek state bonds.
This trickery allowed the Greeks to have several good years. Since entering the euro zone in 2001, social welfare expenditure increased at an annual rate that was 3.6 percentage points higher than that of GDP growth. According to OECD (Organisation of Economic Co-operation and Development) statistics, pensions in Greece, available after only 15 years of work, reach an incredible 111 percent of average net incomes. By contrast, in Germany the average pension level is about 61 percent of average net earnings for people who have worked at least 35 years. The Greek attempt to create a land of milk and honey by excessive borrowing is hair-raising.
If no support comes from abroad, Greece will have to announce a formal debt moratorium, thereby declaring that it will only service part of its debt, as was done by Mexico and Brazil in 1982 and Germany in 1923 and 1948.
The other euro-zone countries, however, will not let Greece go under, because they fear a domino effect similar to the one triggered among banks by the collapse of Lehman Brothers in 2008. If Greece goes bust, investors from all over the world would lose their trust in the stability of the weaker euro-zone members, primarily Ireland, but also Portugal, Italy and Spain.
If these countries become insolvent and curtail their expenditure, they could lead to a new worldwide recession. Of course, the EU countries could leave Greece to the mercy of the International Monetary Fund (IMF), which is willing and able to help - conditional on the government's implementation of a strict austerity program. But many euro-zone politicians regard turning to the IMF as a sign of weakness and prefer their countries to shoulder the burden themselves.
Another reason why help is likely to come from euro-zone countries is that they would bear a substantial share of the Greek losses anyway. Greece's public debt is placed in its own banking system, which is indebted to the European Central Bank (ECB) via the issuance of euros.
If the Greek state goes bust, so will Greek banks, and the ECB would have to write off its claims against them, taking a charge of about 6 billion. And since the ECB belongs to all euro countries, they would all bear the loss.
Helping Greece is easier said than done, because the EU has no mandate to take such a step. On the contrary, Article 125 of the Maastricht Treaty explicitly excludes bailouts, stating that neither the EU nor its member states are liable for the commitments of EU governments. Indeed, some countries insisted on the no-bailout clause as a condition of their participation in the euro, fearing that EU's debtor countries could, by majority voting, expropriate the thriftier countries, thereby generating moral-hazard effect that would undermine the stability of the EU.
That concern remains no less valid today. Thus, only bilateral help seems possible, perhaps coordinated by the EU and coupled with strong supervision of the Greek budget and Greece's statistical office. The Greek statistical office has already been severed from the government, and Eurostat will have the right to oversee Greece's official statistics directly.
Similarly, Greece will lose its sovereignty insofar as the EU will then directly control all budget-relevant decisions of the Greek government. This spring, before the first big issues of new Greek debt are launched, the world will see which solution Europe has chosen.
The author is professor of economics and public finance at the University of Munich and president of the Ifo Institute. Project Syndicate.
(China Daily 02/26/2010 page9)
