{"id":424277,"date":"2010-03-13T09:09:05","date_gmt":"2010-03-13T14:09:05","guid":{"rendered":"http:\/\/www.businessinsider.com\/greece-its-not-all-tragedy-2010-3"},"modified":"2010-03-13T09:09:05","modified_gmt":"2010-03-13T14:09:05","slug":"greece-its-not-all-a-tragedy-its-just-time-for-europe-to-grow-up","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/424277","title":{"rendered":"Greece: It&#8217;s Not All A Tragedy, It&#8217;s Just Time For Europe To Grow Up"},"content":{"rendered":"<p><em>(This post was published on <a href=\"http:\/\/www.voxeu.org\/index.php?q=node\/4747\">VoxEU.org<\/a>.)<\/em><\/p>\n<p>The euro crisis is forcing the EU to grow up &ndash; fast. With astonishing  speed, the Papandreou socialist government has just passed the most  stringent fiscal package modern Greece has ever seen:<\/p>\n<ul>\n<li>Civil servants&#8217; salaries are to be cut, <\/li>\n<li>pensions frozen, <\/li>\n<li>the VAT raised to 21%. <\/li>\n<li>Even the politically omnipotent Orthodox Church is supposed to pony  up. <\/li>\n<li>Corruption and tax evasion are on the public agenda. <\/li>\n<\/ul>\n<p>All of this is supposed to reduce the deficit by 4% of GDP in the  coming year &ndash; a bare-knuckled discussion of the structural deficit that  the Greeks never got around to reducing when they entered the Eurozone  in 2002. We economists warned that the euro wasn&#8217;t a one-way street, and  politicians blithely ignored us. Maybe they&#8217;ll listen this time.<\/p>\n<p>But the Greek &#8220;crisis&#8221; is likely to have far-reaching and healthy  effects on EU governance &ndash; and may even bring new attention to bear on  unsavoury practices of some international investment banks in European  public finance.<\/p>\n<p>Clearly, the Great Recession is responsible for the general  deterioration of EU budgets, even in the absence of aggressive stimulus  programmes. But it also exposed the precarious and unsustainable  situation of Greek, Spanish, and Portuguese fiscal policies, which were  not managed well in good times. As financial markets correctly  recognised, profligate countries will generally always try to hide  behind the fig leaf of an economic downturn to avoid the bitter medicine  of fiscal austerity. While generalised EU fiscal contraction in a  downturn would be more than counterproductive, a serious Hellenic fiscal  correction is necessary and long overdue.<\/p>\n<p>The demonstrations and riots in Athens are an indication of the pain  that Greece will face in the coming years. A fiscal contraction in a  small open economy under fixed exchange rates (i.e. inside the Eurozone)  is likely to hurt in the short run.<\/p>\n<p>These draconian measures are also proof that the Eurozone is forcing  the very political integration that economists were demanding as a  precondition for monetary union (<a href=\"http:\/\/www.voxeu.org\/index.php?q=node\/2070\" >Persaud  2008<\/a>).<\/p>\n<p>Political integration occurs when voters and politician in one  country of a union have direct say in policies taken in another. This  direct interest is usually derived from fiscal concerns as in the  current case, and as usual it results from the citizens of one region  applying its own standards to others. German taxpayers can hardly be  expected to work to age 67 so Greeks can retire at 50 or 55.<\/p>\n<p>Similarly, it is hard to understand how a country can be bankrupt  when it owns billons of euros in real assets (including countless  islands). Texans or Alaskans are certainly entitled to comment on  California&#8217;s or New York&rsquo;s fiscal problems when asked to pick up the tab  for the federal stimulus package, of which almost a quarter was  emergency bailout funding for states. With GDP figures showing the  equivalent of a minor recession of the Eurozone, Greece can only expect  &ldquo;tough love&rdquo; from the EU Commission &ndash; and this is the only credible way  to nudge the mother of democracy, the cradle of Europe, towards fiscal  rectitude. But political integration is also about the rights of Greeks,  Spaniards, Italians and Portuguese to complain about, and even  influence economic policy in the rest of the Eurozone &ndash; meaning  essentially France and Germany.<\/p>\n<h1>Deeper integration<\/h1>\n<p>At the same time, Europeans need to focus their attention on  financial market integration, and on the role of investment banks in  public finance, and in particular the current crisis. It cannot make  sense to allow international investment banks to advise EU member  governments on financial matters, organise the issuance of credit  default swaps on the same debt they have helped issue, and then bet  against that debt via the same CDS via their proprietary trading desks  or hedge funds.<\/p>\n<p>We&#8217;ve heard it a million times, but it&#8217;s worth repeating. Who in  their right mind would allow construction companies to build and sell  houses, organise (and make money on the brokerage of) underwriting of <em>negotiable<\/em> fire insurance policies in unlimited amounts on those houses (by  possibly uninformed, stupid money), and then trade the very same  insurance policies in the market? This is even more absurd if the  underwriting institutions are too big to fail &#8211; i.e. being stupid with  money has no real economic cost because the government cannot credibly  refuse to bail them out (like AIG). Common sense points to the danger of  moral hazard if not outright malfeasance.<\/p>\n<p>Dogmatic adherence to free market principles can only further degrade  our respectability as economists, too often seen as apologists for  financial croupiers. Do we really know enough to deny the existence of  self-fulfilling prophecies, or that uncovered short sales of debt in  thin markets combined with purchases of CDS constitute the equivalent of  a money pump? Isn&rsquo;t it suspicious that, according to the New York  Times, Goldman Sachs sold its famous sleight-of-hand interest swap deal  with the Greek government to a private Greek bank, already in 2005?<\/p>\n<p>One way to chase away this demon is a deeper level of intra-European  financial integration, in particular, a Europe-wide Tobin tax on  transactions involving government debt. (I never thought I would write  this, but I never thought I&#8217;d ever see Great Depression 2.0 either). In  the US, not only is state debt and derivatives traded in deeper markets,  but there is also no chance that California would ever secede from the  union. Europe isn&rsquo;t quite there yet. A small transaction tax on EU  government debt could well suffice to chase away the financial  arsonists. In this sense, the EU or Euroarea could further promote  stabilisation of its public finances as well as of financial markets.  Since most EU government debt is in the hands of European citizens or  European banks, this will have negligible effect on the fundamental  ability of governments to raise money in capital markets. In fact, EU  governments could even give back the revenues to European citizens by  cutting painfully high payroll taxes.<\/p>\n<h1>The IMF &ldquo;cop-out&rdquo;<\/h1>\n<p>But back to the Greeks, who still have to get their house in order.  Some, like <a href=\"http:\/\/www.voxeu.org\/index.php?q=node\/3110\" >Charles Wyplosz<\/a>, have advocated bringing in the IMF  as neutral broker of stabilisation policies for European governments in  trouble. This is indeed the most impressive of commitment devices, but I  doubt Europe could stomach giving away real authority on fiscal matters  to a third party, especially given the dominant role of the US in that  organisation. Besides it would be a cop-out. Europe can&rsquo;t slough off its  important decisions to some faraway place.<\/p>\n<p>If Europe is serious about its political future, it has to take the  next step. A European Monetary Fund &ndash; with the same type of prudent,  independent governance as the European Central Bank &ndash; must be the  logical next step along the path of political integration.<\/p>\n<p><em>It&#8217;s time to grow up, Europe! <\/em><\/p>\n<h1>References<\/h1>\n<p>Prasaud, Avinash (2008), &ldquo;<a href=\"http:\/\/www.voxeu.org\/index.php?q=node\/2070\" >The  financial crisis may hasten European integration but slow global banking<\/a>&rdquo;,  VoxEU.org, 6 October.<\/p>\n<p>Wyplosz, Charles (2009), &ldquo;<a href=\"http:\/\/www.voxeu.org\/index.php?q=node\/3110\" >Bailouts:  The next step up?<\/a>&rdquo;, VoxEU.org, 21 February.<\/p>\n<p><a href=\"http:\/\/www.businessinsider.com\/greece-its-not-all-tragedy-2010-3#comments\">Join the conversation about this story &#187;<\/a><\/p>\n<p><b>See Also:<\/b><\/p>\n<ul>\n<li><a href=\"http:\/\/www.businessinsider.com\/greek-strike-to-shut-down-services-thursday-2010-3\">Greek Unions Plot To Bring Country To A Halt Tomorrow<\/a><\/li>\n<li><a href=\"http:\/\/www.businessinsider.com\/jim-rogers-if-europe-let-greece-go-bankrupt-the-euro-would-go-straight-up-2010-3\">Jim Rogers: If Europe Let Greece Go Bankrupt, The Euro Would Go Straight Up<\/a><\/li>\n<li><a href=\"http:\/\/www.businessinsider.com\/what-do-people-really-think-about-greece-2010-3\">What Do People Really Think About The Greek Crisis?<\/a><\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~r\/TheMoneyGame\/~4\/r1cbbDnMY14\" height=\"1\" width=\"1\"\/><\/p>\n","protected":false},"excerpt":{"rendered":"<p>(This post was published on VoxEU.org.) The euro crisis is forcing the EU to grow up &ndash; fast. With astonishing speed, the Papandreou socialist government has just passed the most stringent fiscal package modern Greece has ever seen: Civil servants&#8217; salaries are to be cut, pensions frozen, the VAT raised to 21%. Even the politically [&hellip;]<\/p>\n","protected":false},"author":6202,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-424277","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/424277","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/6202"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=424277"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/424277\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=424277"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=424277"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=424277"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}