The important thing for Europe is for it to be defined once and for all. Churchill called for a United States of Europe, Schuman created the gradual approach, and de Gaulle opposed any federal encroachment. And this was only the beginning… In short, do we want a federation or a confederation? In this blog we consider the impact of the possibility of Greece defaulting, and this author suggests its eventual removal from the Eurozone, as well as setting out guidelines for future similar situations.
In the short term, the EU needs to make sure if any country is in danger of defaulting, or exceeds limits on its deficit, that there are systematic measures taken. Also, in much the same way as there are limits on deficits, there should be limits on debt given, so that countries know what awaits them. Then appropriate penalties and reprimands can be given. If Greece was suddenly kicked out of the EU, it would set a huge precedent for Portugal, Ireland, and Spain. In addition, it would be unfair to presume this action, as this was never the procedure before. People don’t complain when things are going according to plan, as the Joker from Batman once remarked. Then in the longer run, Europe’s members will know that if they aren’t responsible, the EU will not be responsible for them.
Let’s get one thing clear – Greece is in the EU. It is in the Eurozone. It has public debt amounting to more than its annual GDP. So far, no disputes. Whether you think Greece shouldn’t be in the EU, whether you hate the euro or whether there shouldn’t even be an EU, we can agree on the above facts.
Now here is some recent news, to put things in perspective. The overall rescue package for Greece, Ireland and Portugal of almost €300bn, when you take into account the new promise of another €12bn, sounds horrific, and this is for countries whose debt is 130%, 93%, and 83% of GDP respectively (source: IMF) But, even Germany and France’s debts are looming pretty big. In fact, France has a higher debt to GDP ratio than Portugal. Luckily, their deficits are controllable, as their economies are diverse, and growing. UK, though it has a scary deficit of 10% of GDP, is also managing, thanks to the necessary and efficient cuts that are being put in place. However, one country which has been put back in the shadows, at our own peril, is Spain. Its deficit is running higher than Greece and Portugal’s, and this is partly due to the nature of its economy. This is because Spain’s regional control is self-governing – a positive thing, but it does mean other regions can drag the whole country down (much like Greece and the EU, incidentally). Their economy does also rely heavily on tourism. Last year, for example, a tenth of its labour force was due to tourism. Hence, on deciding the punishment to Greece’s case, we need to consider the possibility of applying similar measures to Spain.
Now the immediate thing is of course to deal with Greece. Since it falsified its figures to join the euro, this author thinks it only fair that they areremoved in good time. A proposal of a new currency initially parallel to the euro, which can then be relaxed to deal with the problem, with its own monetary tools returned, would mean a hard road ahead, but one that it can and should face on its own. It would allow it to learn from its mistakes. There are entry requirements to joining the EU, and to joining the Eurozone, but by that same token if a member is acting reckless, why should it continue to keep its membership?
However, all this doesn’t imply kicking Greece out of the Eurozone immediately. It faces difficulties either way, as can be glimpsed from Argentina’s case in the early noughties and East Asia in 1997. And in fact, it seemed to be doing well, with the right wing New Democrats taking through tough austerity measures. This was all until the Socialists returned in 2009, and enjoyed, much as Labour did, a bit of a binge. All in all, it will be inevitable that unemployment will shoot up, just as it did in Argentina, where unemployment remained above ten percent for seven years. Hence, another consideration has to be the deluge of Greek workers across Europe, and how losing the euro will affect their emigration.
As with any case before, the resolution has involved a devaluation of the country’s currency, and this must happen to Greece for it start to grow again. It can either do it by dragging the rest of the Eurozone with it, or it can deal with its problems and earn its place, not sneak through the back door like the first time. It will be difficult without the looming figure of the EU shaking and pointing its finger. We should at least hope it’s the index finger.