Surprise! Greek Problems Were Not Solved By Kicking the Can Down the Road

Greece is looking like it's falling apart again.  Or perhaps more accurately: Greece continues to fall apart and the lipstick Europe put on the pig a few years ago is wearing off and people are noticing again.

I warned about this less than a year ago:

Kevin Drum quotes Hugo Dixon on the Greek recovery:

Greece is undergoing an astonishing financial rebound. Two years ago, the country looked like it was set for a messy default and exit from the euro. Now it is on the verge of returning to the bond market with the issue of 2 billion euros of five-year paper.

There are still political risks, and the real economy is only now starting to turn. But the financial recovery is impressive. The 10-year bond yield, which hit 30 percent after the debt restructuring of two years ago, is now 6.2 percent....The changed mood in the markets is mainly down to external factors: the European Central Bank’s promise to “do whatever it takes” to save the euro two years ago; and the more recent end of investors’ love affair with emerging markets, meaning the liquidity sloshing around the global economy has been hunting for bargains in other places such as Greece.

That said, the centre-right government of Antonis Samaras has surprised observers at home and abroad by its ability to continue with the fiscal and structural reforms started by his predecessors. The most important successes have been reform of the labour market, which has restored Greece’s competiveness, and the achievement last year of a “primary” budgetary surplus before interest payments.

Color me suspicious.  Both the media and investors fall for this kind of thing all the time -- the dead cat bounce masquerading as a structural improvement.  I hope like hell Greece has gotten its act together, but I would not bet my own money on it.

In that same article, I expressed myself skeptical that the Greeks had done anything long-term meaningful in their labor markets.  They "reformed" their labor markets in the same way the Obama administration "reformed" the VA -- a lot of impressive statements about the need for change, a few press releases and a few promised but forgotten reforms.  At the time, the Left wanted desperately to believe that countries could continue to take on near-infinite amounts of debt with no consequences, and so desperately wanted to believe Greece was OK.

I have said it for four years:  There are only two choices here:  1.  The rest of Europe essentially pays off Greek debt for it or 2.  Greece leaves the Euro.  And since it is likely Greece will get itself into the same hole again some time in the future if #1 is pursued, there is really only leaving the Euro.  The latter will be a mess, with rampant inflation in Greece and destruction savings, but essentially the savings have already been destroyed by irresponsible government borrowing and bank bail-ins.  At least the falling value of Greek currency would make it an attractive place at for tourism if not investment and Greece could start rebuilding its economy on some sort of foundation.  Instead of bailing out banks and Greek officials, Germany should let it all fall apart and spend its money on helping Greece to pick up the pieces.

By letting Greece join the Euro, the Germans essentially let their irresponsible country cousins use their American Express Platinum card, and the Greeks went on a bender with the card.   The Germans can't keep paying the bill -- at some point you have to take the card away.


  1. joe:

    Let's get Krugman's opinion first - lol

  2. Jon Thompson:

    Germany's choice isn't between bailing out Greece before exit and pickup up the Greek pieces afterwards. It's between bailing out Greece before exit and bailing out West European banks afterward.

  3. bolt1493:

    It will play out sooner than you realise as they go to the polls in th enext couple of weeks with the left wing anti austerity party well ahead.

  4. Harry:

    Some Swiss bankers are liberals, but all Swiss bankers are stupid enough to throw their Francs down the toilet. There are limits. Is Atlas shrugging?

  5. Harry:

    Should have said, "...all Swiss bankers are NOT stupid enough.."

  6. mesocyclone:

    Don't you mean "put lipstick on the PIIGS?"

  7. LoneSnark:

    They don't need to leave. Just let them default, again, bail out your banks, forbid them from losing to Greece again. Greece can't over borrow if no one will lend to them any more.

  8. Sam L.:

    Kevin Drum is my Go-To guy on fiscal affairs, when Paullie The Beard" Krugman lets me down. (/sarc)

  9. marque2:

    I think they can drop one I out of PIIGS, Ireland/Iceland seem to be doing OK again. Portugal, Greece and Spain, will always be in the basket, because they business so much, and Italy, is Italy. It seems to get by.

  10. marque2:

    I don't get it. The Swiss are throwing their Francs to Greece?

  11. herdgadfly:

    The deeper problem is the European Union which established a currency exhange that permits free spending liberals in poor countries to spend money that never existed. As captured in this Clarke and Dawes video from several years ago, the real question is:

    "How can broke economies lend money to other broke economies who haven't got any money because they can't pay back the monies the broke economy lent to other broke economies and shouldn't have lent to them in the first place because the broke economies can't pay it back?"

  12. Harry:

    I was referring to the recent readjustment by the Swiss to the exchange rate of the Swiss Franc to the Euro, in effect refusing to be part of the ECB's efforts to prop up Greece, Spain, and other European countries.

    The Swiss are protecting their own currency from what they must see as a de facto devaluation of the Euro. It is my interpretation that they do not, in effect, want to be part of the charitable effort to subsidize the lifestyle of Greek government employees, of which there are many. Sorry if I did not make myself clear.

    Feel free to argue whether the Germans should inflate their money to rescue Greece, or that that can go on forever unnoticed. The Swiss apparently have noticed, since this week it takes more Euros to buy Swiss Francs than last week.

  13. MNHawk:

    Greece to Europe would be like Illinois or California to the US would be, if they could print dollars.

  14. Elam Bend:

    In the end, Greece is small cheese. It's a county of only around 11 MM people with a surprisingly small economy. Greater Chicago with 9 MM people has an economy twice as big. The real concern is that if Greece can escape, then what about Portugal...then Spain...the..Italy?

  15. Mole1:

    There are plenty of states in the USA that are basically carried economically by the other states. Would we be stronger or weaker if we split up the Union?

  16. bigmaq1980:

    "There are plenty of states in the USA that are basically carried economically by the other states."

    Please explain how so?

    My first impression is to agree with this, but then reflecting on it, began to wonder about which states are we talking about, and how exactly were they supported.

  17. bigmaq1980:

    The Euro is flawed. And, they failed to enforce their own rules when the problems were smaller and crises could have been averted. In hindsight, many (all?) of the countries were not willing to harmonize on taxes and regulations to bring their economies in balance.

    For these smaller governments it was too easy to spend without consequence. Outside of the Euro regime they would have met those consequences much earlier.

    It will set a precedent. Not sure it is a bad thing. It is a stark example of the failure of central planning.

  18. joe:

    "There are plenty of states in the USA that are basically carried economically by the other states. "