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IMF's fiscal tough love the best option for Greece

Watching Greek Prime Minister George Papandreou in action is like watching a criminal beg for a get-out-of-jail-free card after a voluntary guilty plea. Greece did everything wrong. It spent too much, lied too often about its deficit figures, treated its public service as a welfare machine, turned tax evasion into a national sport. The result was a debt crisis that walloped the euro and called into question the very survivability of the currency used by 16 European Union countries.

Yet Greece wants more than forgiveness for its sins. It wants to be rewarded for them in the form of financial and regulatory support. On Mr. Papandreou's tour of Western capitals, he pleaded for a clampdown on currency and credit-default-swap speculators (even though they may have done Greece a favour by forcing upon it the fiscal discipline that the European Union couldn't).

He is not specifically asking for a bailout; to do so would be an admission the country has already gone bust. But he is playing the International Monetary Fund against the euro zone countries. If the latter don't come to the rescue, should a rescue be needed, he'll go to the former. Talk about chutzpah. You wonder why the euro zone countries, anchored by Germany and France, don't tell Greece to take a hike.

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Greece seems more trouble than it's worth. It is tiny - representing 2.7 per cent of the euro zone's $13-trillion (U.S.) economy - yet its debt problems are roiling bond markets around the world. Why not let Greece take a euro holiday on a Crete beach, get its financial house in order and reapply for currency membership later? Shorn of Greece, the euro zone could stabilize the currency and focus its energies on burying the recession.

Greece's rap sheet certainly makes the idea appealing. It is the country that, in 2000 and 2001, employed Goldman Sachs to concoct a cross-currency swap that allowed it to hide €2.4-billion ($3.4-billion) of debt, improving its ratio of debt to gross domestic product to please the Brussels currency cops. It is the country that allowed the 2004 Athens Olympics to go billions over budget and added some 200,000 public servants to its payroll between 2004 and 2009, making it one of the most bureaucratic and expensive governments in the West.

It is the country that devoted few resources to tax collection, even though it knew it was the victim of epic tax evasion. By Mr. Papandreou's own admission, fewer than 5,000 Greeks declared incomes of €100,000 or more ("That pattern ends now," he declared in Washington earlier this week).

The result is a genuine crisis. Mr. Papandreou's socialist government, elected last October, revealed last month that the previous government had fudged the liabilities figures for years. In 2009, Greece's true deficit was 12.7 per cent of GDP, the EU's highest. That's double the previous official figure -and more than four times greater than the limit set by the EU. Greek bonds duly mimicked the Titanic, sending their yields soaring. Bonds of other weak euro zone countries, notably Portugal and Spain, also sank and the euro slumped as confidence in it evaporated.

Greece's €4.8-billion austerity plan may or may not work. If it doesn't, the euro zone will test its currency pain threshold. Meanwhile the EU is planning to launch a homegrown version of the International Monetary Fund - the EMF - to crack the fiscal whip on euro zone countries and bail them out if they can't roll over their bonds. The EMF's launch will come too late to help Greece. Perhaps it's time to stop the rot by severing the Greek limb.

To any European, the idea is unthinkable. To contemplate the exodus of a euro zone member is to underestimate the political and economic capital underpinning the currency union's launch in 1999, Europe's most ambitious economic project since the Second World War. The common currency wasn't just about making trade easier between member countries; it was about bringing together countries that had spent a good part of the 20th century slaughtering one another's citizens. Countries whose wealth creation depends on trading with neighbours are less likely to send tanks across borders.

Practically speaking, a Greek exodus would create all sorts of problems. Greece would go back to the drachma, triggering another debt crisis because it would be paying off euro debt with its devalued old wreck of a currency. German, French and Benelux banks that hold billions of euros of Greek debt would face costly writedowns. Countries that export goods to Greece would see their business shrink.

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But another Greek-style mess cannot be allowed to happen. The EU doesn't want to seek the help of the IMF. Doing so would be an embarrassment - proof that the EU can't deal with its own problems. Its main fiscal-policing mechanism was supposed to be the "no bailout" clause - any country that got into trouble could not go cap-in-hand to the EU. Of course the clause failed. There is no doubt the EU will not allow Greece to default. In effect, delinquent countries face no punishment.

The EMF is not the solution for future delinquent states. An EU institution, sponsored by good, bad and ugly EU countries, would have trouble policing and punishing its own. It would be "like sinners judging sinners," German economist Juergen Matthes said.

Countries like Greece should not be booted out of the euro zone. But rewarding them for bad behaviour shouldn't be allowed, either. The least unpleasant option is to bring in the IMF, an outsider with no emotional or political baggage, allowing it to treat its reluctant clients with effective, dispassionate severity.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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