So Antigone had a part in this tragedy too. That's Antigone Loudiadis of Goldman Sachs, who arranged a complex currency swap deal that helped Greece conceal the scale of its debt as the country snuck into the euro zone. Pity Greece didn't consult someone as wise as Socrates; and I don't mean Jose Socrates, the Portuguese Prime Minister, whose own country the gods – that is, bond markets – are also eyeing leerily.
Joking apart, we need to recognize this is not just the first great test of the euro zone but also a defining moment for the whole project of a European Union. Since this is Europe, not Apollo 13, failure is definitely an option. More likely, however, is a muddling through, leaving the old and demographically aging continent even more preoccupied with its own internal problems. And the world will not wait while Europeans spend another decade navel-gazing. Call me Cassandra, if you will, but that's how I see it.
No special gift of prophecy was needed to foresee the dilemmas that now face the euro zone. They were extensively debated before it was launched. I wrote in 1998 that monetary union was “an unprecedented, high-risk gamble,” and argued that it was the wrong priority for Europe at that time. Subsequently, I was lulled into a false sense of security by the euro's apparent success, and by the practical and symbolic pleasures of travelling around the continent with just one currency in my pocket. Now we have the predicted difficulties. As George Soros observes, a “fully fledged” currency needs not just a central bank but also a treasury. It requires a degree of fiscal as well as monetary discipline, linked with the capacity to make fiscal transfers to suffering areas (complemented by labour mobility from those areas), as you have in a country like the United States or the United Kingdom.
To survive and prosper, a European monetary union must develop at least a stronger element of economic union, and that in turn requires a stronger element of political union. Which, by the way, was one of the main motives for some of the chief political architects of what was then deliberately called “economic and monetary union,” including François Mitterrand and Helmut Kohl. This was not just, as is often said, Europe putting the (monetary) cart before the (political) horse. It was an attempt to use the cart to bring on the horse. It was the last big fling of the so-called “functionalist” approach, by which you build a politically integrated Europe through economic integration. Broadly speaking, that worked for half a century, from the 1950s to the 1990s; but in this case, it has not.
By its mendacious and self-harming profligacy, Greece has precipitated the crunch. Greece is unique, even among the PIIGS (Portugal, Italy, Ireland, Greece, Spain), in its combination of massive deficit (an estimated 12.7 per cent of GDP last year) and massive debt (some 125 per cent of GDP and rising). It has not only lived beyond its means; it has used its years in the euro zone to become even less competitive.
Yesterday, the country was hit by the second general strike in two weeks, and we ain't seen nothing yet. Greece has promised its euro zone allies to get its deficit down from 12.7 per cent to 8.7 per cent this year. Oh yes, and pigs can fly. Even if the Greeks let their government do the right thing, such deep cuts, as well as structural reforms, can make things worse before they get better. Meanwhile, it seems the Greek government needs to borrow about €55-billion this year, up to half of it within the next three months. What if the gods (bond markets) grow angry and decline to play?
