The last act of a Greek tragedy

The history of Western literature starts with the Greek tragedy: in modern times, the term could become equally well known for the crisis in the euro zone. The analysis of the crisis often gets focused on Germany’s emphasis on austerity and the profligate macroeconomic policies and lending practices of some of the economies now in crisis. But do the problems have much deeper roots, in particular in the modern tendency to use mathematical models and numerical standards in social sciences, particularly economics? (I revert to this point later in the article.)

Greece had the second round of elections last Sunday. A centre-right party, amenable to the austerity programme, got the largest number of votes but the second largest vote went to the extreme left party which rejects the approach. Hopefully, the former will be able to form a governing coalition which would need to restart the tortuous negotiations about the austerity programme, which has already led to growing social instability—hunger, strikes, demonstrations, increase in unemployment and crime, violence against immigrants, the rising vote share of extreme left and right parties, etc. Meantime, the Germans remain firm on their conditionalities. How things have changed since G.W.F. Hegel, the 19th century philosopher, wrote about the Greek civilization: “At the name of Greece the cultivated German finds himself at home…science, and art, all that makes life satisfying and elevates and adorns it—we derive, directly or indirectly, from Greece.”

But to come back to the “original sin”, was it the purely numerical convergence criteria stipulated for joining the single currency? —inflation, fiscal deficit, debt as a percentage of gross domestic product, etc. Are the basic differences between the north and the south in the euro zone arising from cultural patterns—the puritan work ethic of the north vs the more easy-going, “siesta-loving” south; the stricter value systems about discipline, payment of taxes, corruption, merit over connections and loyalty, etc? Whatever my criticism of the over-emphasis on numbers, I cannot help quoting one as an example of the work culture—were Greece to have the same number of civil servants as a proportion of population as the UK, the number would be 90,000; it actually is almost 800,000.

Meanwhile, there has been some progress towards finding a solution to the Spanish banking crisis. The euro zone has given a facility of €100 billion for the purpose, but its basic nature is different from the loans given to Greece, Ireland and Portugal. While the facility is a sovereign obligation of Spain, there are no macroeconomic conditions attached to it. There is also a favourable climate developing for a banking union in Europe: a common regulator and a single deposit insurance corporation at least for the larger banks. The financial markets do not seem to have much faith that the Spanish problem would be solved, or even contained, in the near term. Yields on Spanish bonds and the premium on credit default swaps have gone up this week and rating companies are busy downgrading bank after bank as property prices continue to fall. One good news from another part of the zone is that the Irish referendum approved the conditions under which the country has borrowed money under the European Union facilities.

The Germans preach austerity partly also because they have themselves taken the bitter medicine at the time of the unification of Germany—cuts in social benefits, very little rise in wages, etc., for a decade. To be sure, Keynesian economists such as Joseph Stiglitz, Paul Krugman, Barry Eichengreen and Nouriel Roubini have strongly criticized the imposition of austerity at a time of huge and growing unemployment, falling output and worrying social instability.

There are two clear alternatives for the euro zone—a closer union and federal structure on the model used by Alexander Hamilton in the 1780s in the US to solve the problem of some states with unserviceable debts; or a break-up of the zone with the weaker members leaving. The latter could be very costly for all, not only for the departing countries but also for Germany itself. A split would hurt German exports and lead to a major fall in the value of the €800 billion credit balance of the German Bundesbank with the European Central Bank: the balance keeps going up daily as there is an increasing level of capital flight from Greece and Spain to Germany. A split would also be very costly for the global economy.

Going back to the origin of European integration, Friedrich Nietzsche, a German philosopher, wrote back in 1887: “Within 50 years these Babel governments (the democracies of Europe) will clash in a gigantic war for the markets of the world.” But he was also hopeful that out of that madness will come the unification of Europe. He was not far wrong although it took not one but two world wars and 60 years for the birth of the European project, which, today, seems in total disarray. The last act of the tragedy is more likely to be written in Spain not Greece, which is too small.

A.V. Rajwade is a risk management consultant, columnist and author.

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