The Fate of the Euro is being decided in Greece
While European politicians 'buy time' with their taxpayers money (in order to avoid taking difficult decisions), the Greek government has been running the Show.
On the 27th of February, the German government took the decision to extend aid to Greece. Moreover, on the 9th of March, the ECB started its QE programme, buying Euro 60 billion of Eurozone government securities every month.
On one hand, the neutral spectator risks being bored by the long drawn-out last Act (for now) of this Greek Tragedy. Once again, the Greek government has been " bought time " at the expense of the rest of Europe.
On the other hand, the Act may amuse the spectator with bizarre, comic antics, such as threats (to the main money provider, Germany), to furnish economic migrants and terrorists with the necessary papers to allow them to travel to Berlin, or alternatively, to seize the Goethe Institut in Athens.
Since the first bailout package for Greece in March 2010 - the original Monetary policy sin - the process has been repeated. There was a second, even bigger bailout package and in 2012, a debt haircut, which effectively released every Greek citizen from some Euro 10,000 of debt.
The ECB also gave the Greeks a hand, to the point where the ECB's own credibility as a politically independent Central Bank, committed to price stability, was put at risk. The ECB accepted Greek bonds as collateral despite junk ratings, allowed emergency loans ( Emergency Liquidity Assistance known as ELA) and even bought Greek government bonds.
Q: How much longer will these bailouts be repeated and amplified?
A: Until the Greeks' problems are solved - and they are as follows: stifling bureaucracy and over-regulation, lack of entrepreneurial freedom and incentives, corruption and nepotism, inefficient state-owned enterprises and excessive wages.
The cause of the lack of competitiveness is soon named : a huge state sector.
When a government spends money, it deprives the private sector of vital resources and increases the costs faced by the entrepreneur. The tax burden will increase for the private individual, and the entrepreneur finds that he is competing with the State or public sector, with excessive public wages, unemployment benefits, and pensions that start too early or are set too high.
The cause of the misery in Greece, and lack of competitiveness, is a State bubble inflated with cheap money. Athens used their first years in the Eurozone to expand their Socialist amusement park.
This State sector, in which life could be very enjoyable, was and still is very expensive to maintain and could only be realised through the accumulation of a mountain of debt.
The way the Euro was designed makes it possible to shift the burden of a government deficit partly onto foreigners (who also use the Euro currency). If a Greek politician runs a deficit in order to fulfil his election promises, the government bonds that he issues can be purchased by the banking system and deposited with the euro system (the ECB) as security for fresh loans. The result of running a deficit is that the money supply will increase and prices will tend to rise, not only in Greece but also in the rest of the euro zone. In other words, the cost of the Greek government spending can be partially passed on to residents of other Eurozone countries in the form of a loss of purchasing power of the Euro.
Since it is not only Greece that can use this mechanism, we are dealing with a Tragedy of the Commons - named after the shared and overgrazed communal grassland. Any independent Eurozone government can take advantage of this central banking system to finance their spending.
The attempt to control the use of this financing mechanism with a deficit limit of 3 percent of GDP, as specified in the Stability and Growth Pact, fails because of the nature of the present Covenant. It is a voluntary agreement between independent nations, managed by short-sighted politicians who are only focussed on the next set of elections and their own national interests.
Just as common land becomes overgrazed and eventually useless, the commonly exploited resource in the Eurozone is not common grazing land but the purchasing power of the Euro currency. Hence the self-destructive tendency of the system. How will it eventually end? We may get the answer in the next Act of the Greek drama.
Basically, there are three possible scenarios.
The first scenario is that the necessary structural reforms are finally implemented. A strict observance of the deficit ceiling would allow the Euro to survive. If the ECB and the Eurozone were to suspend their aid to Greece, the pressure for reform would increase significantly. If the Greek government were to remain in the Eurozone, they would have to make do with what they take in taxes.
However, Athens seems unwilling to carry out the necessary reforms, even though it is committed to do so on paper. For they are mostly going in the wrong direction.
The right direction would be to tackle the Greek problem; the bubble in the public sector and the problem of too much government. However, the Greek government does not want to shrink the government sector. On the contrary, they want to increase the burden on the private sector. They want to combat tax avoidance and evasion, close loopholes and put a stop to smuggling and blackmarket activities. The Greek government wants to increase revenue, instead of cutting expenditure. They want more government.
In order to be competitive and to create wealth, the private sector needs exactly the opposite : fewer barriers and regulations and lower taxes. To this end, the State would have to radically pull back. Apparently, the Greek government does not want to accept this loss of power.
The second scenario for the Euro is disintegration.
The net contributors - ie. net losers - to the Monetary Union, above all Germany, are still far away from an exit. Germany does not want to go down in history as the country that decisively torpedoed the European 'unification project'.
However, a Grexit or Graccident (an accidental exit from the euro), should not be excluded. If the bailout partners insist on their demands for reform, Athens might refrain from further requests for help, because they fear that the political consequences of these reforms might result in their government being voted out of office. So one possble result of the rescue measures demanded by the ECB and the Eurozone would be to point the Greek government to the exit door.
In the case of a GREXIT, the lights would only go out if the withdrawal from the Eurozone is made with a desire to make the necessary reforms. The result would be a flight of capital and entrepreneurs and a general sell-out. The cleansing storm could wash other Member countries out of the Euro.
Thereafter, the Eurozone would be restored to health, a deterrent created. The euro could develop into a hard currency. However, since the politicians are afraid of such a storm, a Grexit seems unlikely, especially as Tsipras & Co. probably prefer their salaries and pensions to be paid in Euros rather than in devalued drachma.
The third scenario is a transfer union, the ultimate dream of the government in Athens, whose policy is aimed at further Eurozone transfers. Each Act of the Greek tragedy has brought us closer to this aim. To turn away from this path is becoming costlier and therefore less likely.
It is a tragedy of the commons in which the Greek bull grazes with ease while the German milk-cow is pushed to the edges and looks on with displeasure.
Sooner rather than later, the Eurozone might have to decide which of the three ways they want to take. Thanks to Greece, the decision will probably have to be taken earlier than the constantly time-buying politicians may have hoped.
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