Greece is, once again, on the verge of bankruptcy and, once again, is asking its European partners for help. These partners are reluctant to do so, but cannot completely ignore their responsibility on what is quickly becoming the failure of the Eurozone, the 11 countries using the Euro as their own currencies.
The criteria of the Maastricht Treaty that support the Euro exploded in Greece. Lack of financial discipline is common in Greece: the public sector is widely corrupt, the underground economy is estimated at 25% of the economy, and the wealthy hardly pay any taxes. What is therefore at stake is a transformation of the Greek mentalities.
With $450 billion of public debt Greece's credit rating has recently been lowered by Fitch Ratings to BBB from A. If Greece were not part of the European Union, it would not reach investment grade. Rather than dispatching people to examine ways to improve its situation, Greece's rating Prime Minister reacted by accusing Fitch to "threaten Greece's sovereignty".
When the European Union launched the Euro ten years ago, several mechanisms were put in place to force the convergence of the European economies. It was indispensable for the coherence and the credibility of the new European currency that is now the currency of over 300 million Europeans. They were looking at a maximum of 60% of total sovereign debt to GDP and did not allow a budget deficit over and above 3% each year. Greece is at 107% and 9% respectively.
Greece has the highest public debt and the highest public deficit of its recent 16 years. It would be completely absurd to allow Greece to refuse IMF assistance to avoid urgent corrective measures and obtain them without condition from Europe. Greece should look at the stringent economic measures taken by Ireland to correct a much lower deficit. The accumulation of that debt is not new and took years to build. Nobody amongst the European institutions (Commission, European Central Bank and regulators) was blind to the situation. So why did they not act?
This is precisely the question that we need to ask ourselves: it is nice to have criteria but if there is no independent authority to implement the corrective measures and impose sanctions on the failing Member States they are meaningless. In fact, the sanctions are the prerogative of the Member States: in other words, it is political bargain. When President Sarkozy refuses austerity measures to curb its own public deficit, where will Europe find a way to act on Greece?
The complacency of the European Governments predates the financial crisis but has been exacerbated by the numerous interventions of stimulus plans.. For years Europe has accepted a reporting of the Greek financial situation that was notoriously questionable. Only last week a squad of Eurostat, the European statistical bureau landed in Athens to "verify the numbers".
Greece's situation and the European reaction demonstrates the dangers of a common currency without economic authorities empowered to preempt such a crisis or to correct and sanction non-compliance to IRS own rules. At least German Chancellor Angela Merkel admitted that all member states had a "common responsibility" in the Greece situation.
Every nation makes mistakes: the test will be in the ability of Europe to impose measures similar to the IMF interventions for its support of Greece, not just "encourage Greece to take remedial action" as Jean-Claude Trichet, President of the European Central Bank stated yesterday. He does not have the powers to act.
Unless decisive action is taken, the Euro will be the first victim of that lack of fiscal and monetary discipline. Let's hope it will be the electroshock therapy Greece needs, but also an opportunity for the Eurozone to reflect on its failure.
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