Politicking Time Bomb: Adding Greece to the fire

by Andrew Dusek | March 16, 2010 | Montana Kaimin

We live in a world where excessive spending and unregulated markets have plunged the world into turmoil.  Due to the interconnectedness of the global economy, the fiscal irresponsibility that led to our own economic troubles hasn’t only hurt the United States, it has threatened the financial well-being of the entire world. 

One has to look no further than across the pond to see how our economic rival, Europe, has been affected by the global financial crisis.  As a whole, the European Union is a strong and formidable economic entity.  Its collective wealth, in terms of Gross National Income, accounts for about 30 percent of the world’s total.  It also regulates a market of nearly 500 million consumers, which is around 40 percent more than the United States.  Despite the strength of the world’s most successful regional government and trading bloc, however, the parts are not as strong as the whole.

Iceland was one of the first casualties of the international financial crisis and its economy was nearly bankrupted while the country was applying for membership to the EU.  Ireland, Portugal and Spain soon followed.  Now, Greece seems to be the newest “sick man of Europe.”

After a recent currency crisis, Greece seemed headed for default.  If Greece had defaulted on its loans and gone bankrupt, other EU countries would have been pulled down with it.  To combat this impending fate, the Greek government proposed two austerity packages, but both failed to increase investment confidence among its EU allies. 

That all changed, however, after Prime Minister George Papandreou announced his support for austerity last week.  Under pressure from Brussels, his government immediately began implementing severe measures to set the economy back on track, like increasing a value-added tax, implementing a freeze on pensions and slashing civil servants’ holiday bonuses by 30 percent.  All of this was accomplished to the tune of €4.8 billion and the resentment of countless civil servants. 

While workers may have been enraged by these drastic measures, consumer confidence rebounded slightly and bond sales soon resumed.  Papandreou, however, appears naïve enough to assume these painful measures alone will be enough to qualify for full support from his EU partners.  As one might expect, Europe hasn’t been so forthcoming.

Stronger individual economies, especially those of France and Germany, are strong enough to continue providing bilateral support, but they recognize the
difficulties of bailing out their Balkan brother.  German Chancellor Angela Merkel has raised questions about whether to continue aid or let Greece suffer to prove a harsh point about fiscal responsibility.

While this may seem unduly harsh, Germany understands a thing or two about economic policy and the Germans can’t solve the problem themselves.  Greece desperately needs €20 billion in the next two months to ease market pressure.  While Greece could court investment in bonds, Greece is still beholden to German aid and it can’t afford to go on borrowing indefinitely at an advantage over Germany.

In addition, if France and Germany provide continued support to Greece, they are establishing a dangerous precedent.  A bailout of Greece would illustrate that delinquency among irresponsible investors really does pay and this would invite others to act similarly.  Greece would basically be absolved for years’ worth of irresponsible fiscal policy with few, if any, consequences. 

While many speculate that Germany may indeed withhold financial assistance, the wellbeing of the EU is contingent on the success of it parts and no one nation would stand idle while the Union suffers.  If Greece went under, it would create a chain reaction that would be too horrible to imagine.  The EU can’t afford to see its cohesion dissipate.

While the EU dithers, however, Greece may be forced to turn to the International Monetary Fund for a standby loan.  This option is not desirable.  The IMF would likely tell Greece to intensify cutbacks of pensions and civil service jobs.  The Greek people will not stand for this.

The hardships that have befallen the United States aren’t unique.  While we still await our own economic turnaround, the case of Greece illustrates the importance of international interdependence.  It is important to think of those who suffer alongside us. We need to look beyond the lingering effects of our own domestic meltdown; there are other areas of the world that are reeling far worse than we are.

Andrew Dusek is a senior majoring in print journalism and international relations and comparative politics.

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