By Robert Romano — When Greece entered the Eurozone in 2001, it was with the promise that the common currency would benefit the Greek economy, facilitating trade and commerce, and crucially, lead to lower cost borrowing both privately and by the government.
Now, more than ten years later, the outcome of that decision has proven to be a complete catastrophe. Europe is in or is on the verge of a recession brought on by too much government debt. As for Greece itself, borrowing costs have become untenable as the country has no ability to monetize its debt, having ceded its seigniorage rights to the European Central Bank (ECB).
At last count, 10-year Greek bonds are priced at an annual interest rate of 27.5 percent; 1-years now go for an astronomical 1,143.1 percent.
It seems now only psychosis keeps Greece in the Eurozone. By every discernible metric, all of the purported benefits of the Euro have proven false. True, Greece did get to borrow cheaply for its bloated public sector pension and health system for a few years, but that situation turned out to be only a temporary sojourn through Candyland.
Yet Alexis Tsipras — who’s Coalition of the Radical Left party won 16.8 percent in May 6’s parliamentary elections in Greece, achieving second place on a platform rejecting the terms of the bailout agreement — inexplicably defends Greece’s place in the Eurozone.
After his party’s remarkable electoral performance, Tsipras said exiting the Euro would be “an exceptionally negative development … not just for Greece but for the whole of Europe.”
It perhaps is a case where even a supposedly “radical” politician talks a bigger game than he ever intends to deliver on. Tspiras’ only credible threat of force on behalf of the people Greece was to exit the Euro unless the bailout was redrawn. Yet, right off the bat, he took that threat off the table.
“Greek politicians want to have their cake and eat it to, as they want to continue their government’s spending spree and have the rest of the world to subsidize it. They want to stay in the Euro, and yet want to keep their fiscal sovereignty. But Greece can’t have it both ways, as these are mutually exclusive,” warned Americans for Limited Government President Bill Wilson.
He added, “If Greece really wants to stay in the Eurozone, it will pay for its past mistakes and certainly cede its sovereignty to Brussels. In truth, an exit from the Euro and a return to the drachma is Greece and her people’s only salvation.”
Yet, Greece does not see it that way. For Greeks — and other Europeans — membership in the Eurozone and the European Union (EU) are matters of national pride, right up there with winning a World Cup playoff match or having a local pop culture icon make it big in America.
Further losing connection with reality, even German Chancellor Angela Merkel said on May 14 that “I believe it’s better for the Greeks to stay in the euro area”. Like, how?
Greece simply cannot afford to service its debt at today’s interest rates, and is only being kept afloat by €130 billion of refinance loans from the European Financial Stability Facility (EFSF) and the International Monetary Fund (IMF), which the U.S. contributes to.
Meanwhile, it lacks the political capacity to bring its budget under control.
Greece never followed the Maastricht criteria for inclusion in the Eurozone in the first place, has never abided by its budget limits, and likely never will. It lied in 2000 to enter the currency using manufactured government statistics showing lower inflation and deficits than was the case, and the most recent crisis erupted when €43 billion of off-balance sheet liabilities were discovered in late 2009.
Simply put, Greece — like other Eurozone members — never wanted to get its fiscal situation under control. It simply wanted the purported benefits of adopting the Euro, including cheaper borrowing. Instead, its profligacy merely exposed the critical flaw of the experiment in the common currency.
With neither an efficient printing press nor a desire on members’ parts to monetize each other’s debts, member states lack a means of readily expanding the lending capacity of the continent’s financial system when budget limits are not observed. This in turn has led to interest rate spikes on sovereign debt when the limits of credit expansion are reached.
For these reasons, by almost every conceivable measure, Greece would unquestionably be better off revaluing its debt in the drachma. High borrowing costs would almost instantly be alleviated, as Greece would be in control of its own financial system. It would be able to expand its banks’ capacity if it so chose.
One caveat would be that if it chose to monetize the debt too much, Greece would face higher inflation as the drachma weakens.
But at least then inflation would be a political choice. For now, Greece and other profligate nations want to export inflation to the European core. Pressure has been placed on Germany and others to accept the bailouts (and the accompanying monetary expansion) as the only alternative to financial chaos. It is a false choice.
After all, Merkel’s real motive for wanting Greece to stay in the Eurozone may be the banks that lent money to Greece would be have to be repaid in a devalued drachma, magnifying losses once the new exchange rate is taken into account. JP Morgan is reporting that immediate losses of a Greek exit could total €400 billion.
But that estimate assumes a 100 percent default. When Greece revalues into the drachma, it will be able to make payments, just not in the Euro.
The key point is that even if banks do face big losses for their bad bets on Greek debt, that is still a better alternative than a situation in which Greece is never able to get itself back on a sustainable footing and the crisis worsens.
It may be time for the banking cartel — and Europe as a whole — to cut their losses and move on. Moreover, if other Eurozone members politically want to continue to deficit-spend beyond what the Maastricht criteria ever allowed, then the Euro itself should be abandoned, because it the ECB system was never designed to monetize the debts of the entire continent.
The real choice is between sovereignty and submission to Brussels.
Greece is akin to a zombie handcuffed to the rest of Europe — and there appears to be no key to unlock the shackle. There is no provision for expelling a member from the Eurozone. Only Greece can decide to leave. It should, not only for its own sake, but for the health of the entire continent.
Robert Romano is the Senior Editor of Americans for Limited Government.
