When you mix economics and politics sometimes good things happen. Each discipline applies the brakes of common sense to the dumber ideas of the other and the result is often a pleasant surprise.
Often enough, though, mixing economics and politics means that no matter what choices are made, things get worse.
Europe found itself in that situation earlier this week, thinking first that it had an agreement for its financial crisis that would handle Greece’s inability to cover its debts.
The agreement launched a brief episode of euphoria in financial markets around the globe. The glorious reality that is Greece returned quickly, though, when Greek Prime Minister George Papandreou suddenly tossed a monkey wrench into the works by announcing plans for a public vote on the spending reductions that had been agreed upon as part of the bailout package.
Then on Thursday he did a 180, abandoning the idea of a vote.
Stocks rose in the United States and in Europe as the news spread. The Dow jumped 208 points and closed over 12,000.
It was smart for Papandreou to dump his plan, because little good would have come from putting a new layer of politics in the mix.
At its best the European financial agreement is an interesting example of economic decision making in the noise, heat and uncertainties of the arena. The arena in this case, though, was more like a banking barbershop, and the weapons weren’t swords, tridents and nets — but scissors. The entire deal was about who would get the biggest haircut.
Europe’s central banks and privately owned commercial banks held large amounts of Greece’s bonds that it couldn’t pay off, ever. If Greece were to default on its debt the bonds would be a total write-off and the losses would be so huge as to threaten the viability of the entire European banking system.
Even without a Greek default, the dimensions of Europe’s banking system capital problem are intimidating, and the politics even more so. French President Nicholas Sarkozy, for example, recently asked the Chinese government for its assistance because the European Financial Stability Facility — a kind of “Banque du Last Resort” for the European banking system — is overextended and undercapitalized.
The agreement on Grecian debt was initially delayed because the commercial banks figured that it was a sovereign debt problem that the government should take care of. The central banks wanted the commercial banks to share the pain. Then the agreement was delayed again by requiring approval from Greek voters.
Papandreou’s flirtation with calling for a referendum may seem an act of bad faith after the bailout agreement was signed, but it probably represented a realistic assessment of the political situation there. The government that he heads lacked the ability to impose an austerity program on a populace that rejects it and will actively resist it in the streets.
Successive governments there have created generations of citizens with near-total dependence on the public sector. Faced with cutbacks, they are exceedingly unhappy and reacting as hysterically as any children might, even children of the state.
Papandreou himself faces a no-confidence vote in Parliament, amid the boiling currents of Greek political sentiment. There is considerable support in Greece for the idea of severing its ties to the European Union and dumping the euro in favor of a disinterred drachma, its previous currency. This idea mirrors a popular sentiment in Northern Europe. In Germany and France, a substantial number of people feel like involuntary organ donors whose sacrifice would clearly be unappreciated by its wastrel recipient.
Cutting Greece loose makes sense to a lot of people, but not generally to those concerned with the stability of the global financial system — or to those who see a Greek default opening the door to anti-West, anti-U.S. influence and control.
The underlying economic problems are the twin imbalances in the Greek economy. Its operations are out of balance because its public sector is too large and too lard-laden to be supported by the revenue-generating private sector. That creates a chronic deficit.
Greece has also failed to balance its future with its present, creating an expanding tumor of forward debt that it can never pay off.
The idea floating around Athens that repudiation of its sovereign debt, return to its own currency, and letting tourism support the economy is a popular myth. Even if they were to kidnap tourists and hold them for ransom there isn’t enough revenue in that sector to support the swollen Greek public sector and its pension system.
We do not know what will happen in Greece but we do know that the choices and options are all unpleasant.
If you cannot hear the echoes and reverberations of this Greek drama in our own economic situation you should take your ear buds out. The only difference is that we still have time to do something about it. It would be a tragedy if we didn’t.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
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