The ancient Greeks lived by two creeds etched into the temple of Apollo at Delphi: “nothing in excess” and “know thyself”. The modern Greeks haven’t paid attention to either. The same goes for the rest of the world.
The current Greek tragedy involves not just excess—with a budget deficit at 13% of gross domestic product—but also a matter of not understanding the inherent nature of the European Union (EU), of which Greece is a part. Other members of the EU, however, do understand, which is why after weeks of deliberation, they still don’t have an answer to the Greek question. Financial markets tanked late last week because European leaders couldn’t come up with a detailed bailout plan.
Greece failed to identify its original constraints. In most countries, governments can get their own central banks to buy up their local currency-denominated debt. Greece can’t: It controls its fiscal policies, but its currency, the euro, is shared by 15 others and regulated by the European Central Bank. The EU is also legally prohibited from coming to the aid of a member, while individual nations don’t want to shore up another’s debt.
Other European nations are also fiscally ailing. But they are similarly constrained. Which is why traders are betting a record $7.6 billion that the euro will keep declining.
These European nations aren’t the only ones to have splurged without understanding limitations in the last decade. The constraints may be different in different places, but thanks to a debt-fuelled boom, governments just forgot they existed. In 2008, when the private sector collapsed, governments started getting pinched because they had to substitute private demand with their stimulus programmes. The chickens had come home to roost.
To put it more starkly, what if the private sector debacle that started in 2008 was just a blip? Given the imbalances in the global system, the public sector could have been at risk all along. The explosion that we saw on private sector balance sheets in 2007-08 could well have started with, say, a country’s currency—as we may now be seeing with the euro.
If this is a global contagion, it will leave countries with high public debt, such as India, especially vulnerable. Ten days before the Budget, let’s hope Pranab Mukherjee understands his constraints and doesn’t commit any excesses.
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