The Tragedy Of The Euro
Member states had no realistic option but to bail out their banks, and public sector borrowing rocketed, funded by the EU, the ECB and the IMF. The crisis in Greece was worsened when in late 2009 the government was forced to admit it had lied about its budget deficit for years, and finally admitted to a far higher current-year deficit than previously disclosed. Greece’s 2009 budget deficit was doubled from about 7.5% to 15.1%. The rise in bond yields meant Greece was unable to continue to fund her deficits and roll over existing debt and capital fled to supposedly safer Eurozone jurisdictions.
Greece’s corrupt government was replaced in January 2015 by a far-left government, elected because it promised the voters it would reject onerous bailout terms. It turned out that as far as the ECB and Brussels were concerned, Greece’s problems were to stay in Greece, and any hopes that its troubles would be shared with the Eurozone were dashed.
In effect, it appeared that the expense of rescuing a very small member of the Eurozone risked destabilising the others. Yanis Varoufakis, the Greek finance minister, said the reason for the EU’s uncompromising approach was it was protecting the German banks from losses. A sensible compromise to help a member state struggling with debt had been dismissed out of hand.
Dealing with future financial crises
Commentators also argued that the EU and ECB had pursued a hard line on Greece in order to persuade other member states, who were clearly in similar difficulties, not to rely upon help from the centre. This argument makes sense. But worryingly, the Greek episode also exposed the lack of any mechanism to deal with the unexpected. There had been evidence of this at the outset, when the Maastricht conditions were enacted. Lawmakers made no allowance for economic and monetary cycles in 1992, but by 1999’s joining-date there had been three destabilising crises: Russian debt, the LTCM hedge fund crisis, and the Asian financial crisis. These combined to suppress global GDP growth and undermine assumptions about the predictability of national statistics. Dealing with future crises was obviously going to be a problem, and internal ones later arrived on cue, with Ireland, Cyprus, Spain and Portugal. Then there was and still is Italy.