The Greek debt crisis

(comment posted initially on Gavyn Davies's blog at the FT)

I wonder why such a ruckus ... this was all supposed to happen from the euro's inception : you anchor the currency implies that you lose the easy solution to the loss of competitiveness (devaluation) which in turn means you commit yourself to the better, if much bitter medicine of structural reform. The current drama is what the Greek need in order to swallow it. The Latvians didn't kick up such a fuss when the crisis forced them to an "internal devaluation" (wage deflation) - unlike the Greeks, they weren't wedded to the good times yet.

The thing is, the Greek economy is sclerotic, in thrall to special interests and lobby groups and badly needs reform. Remember the Greek trucking license (worth 300Keur) ? If the current debt crisis applies enough pressure, more economic sectors will be liberalized and the Greeks and their economy will (in the medium term) benefit. It couldn't have been done by a Greek government under any other circumstances (as illustrated for instance by the Paris taxis - where a license is worth "only" about 250 Keur).

This crisis is good for Greece and good for Europe because it will advance federalist ideas (such as the European Ministry of Finance), will legitimize EU-level surveillance of member countries and strengthen economic governance. The Greek debt CAN get under control if enough assets are sold. Here I admit I'm less sanguine than one year ago - I wonder what games Samaras plays - does he actually have a plan or is he simply posturing irresponsibly ? The debt needs to be paid, a credit event risks being perceived as a lethal wound to the whole European project; too many people have invested too much in this project to let it fail so miserably; not to mention the obviously very, very bad consequences of a return to financial chaos via a domino effect (if Greece defaults, who's to say that Ireland won't and if Ireland defaults who's to say that Portugal won't, etc.).

"Kicking the can down the road" is THE thing to do : the Greeks need some persuasion to pack their beach towels and get back to work on reasonable wages. You'd do no one a favor by letting them off the hook. Shacking them until they pay back is what any responsible father would do to his profligate, lazy, but beloved son. And it comes with the additional advantage of keeping the euro weak (see for instance the SFr parity) without the long term consequences of money creation - this, the Germans exporters can only like.

So here is my message to EU politicians : keep muddling for as long as is needed to achieve the important goal of reforming the Greek economy, the muddling is actually to (almost) everybody's benefit - it even provides great copy for the media.