The Greek prime minister has resigned, the Italian one will. These are the desired results of the “friendly” pressure from France and Germany and the less amiable sort from financial markets. But now what? Beyond these symbolic outcomes, everything is more or less the same, or even worse.
Greece is still bankrupt and Italy has entered an explosive debt spiral with interest rates shooting above 7%. Even a “technocratic government of experts” in both Athens and Rome wouldn’t change these facts. Next year, Greece will clock negative growth for the fifth year in a row. Its GDP, as I see it, will be somewhere between 20% and 25% lower than it was in 2007. This evolution recalls the US experience during the Great Depression from 1929 to 1934. Even had the Greek debt stayed constant in the last five years, Greece’s debt-to-GDP ratio would still have increased by more than 25 percentage points. This means the drastic austerity measures adopted so far have only succeeded in pushing Greece further into poverty.
We can continue to joke about the number of untaxed swimming pools in Athens and the supposed 400 blind people living on an Aegean island with 800 inhabitants. But at some point, we need to question whether the brutal and collective punishment of the Greek population for the misdeeds of their government – falsifying statistics to gain acceptance into the euro – is justified. After all, it was the foreign creditors who eagerly lent money to a country they had perceived as being as solid as Germany. And by the way, did we ever hear the Germans voicing doubts and concerns about Greece before 2010?
Italy is even more of a sad story. I remember the first time I was confronted with economic statistics. It must have been in the early 1980s, when I was still a youngster. My father and I were watching news on TV announcing that Belgium would be the first developed country since World War II to post a government debt higher than its GDP. The journalist went on to say that Italy was just behind. And what did it mean? Nothing.
Italy has had a high debt-to-GDP ratio for the last thirty years, yet no one seemed to care until a couple of weeks ago. The ratio occults the fact that Italy has been among the most virtuous European nations in the last decade. It entered the Eurozone with a debt-to-GDP ratio above 115% and reduced it to about 104% by 2007 despite having almost no growth at all. For comparison, take the supposedly more serious countries of France and Germany. From 1999 to 2007, their debt-to-GDP ratios went from roughly 60% to almost 70%. The soon-to-be-former Prime Minister Berlusconi might be considered a buffoon by many, but fiscal profligacy was not one of his flaws.
You might object that Italy has a growth problem, and you would be right. Since entering the Eurozone, its competitiveness as measured by unit labor cost has declined relative to Germany’s by more than 30%. But austerity will not solve the lack of growth. It will only exacerbate it.
After Greece, Ireland, Portugal, Spain and now Italy, who will be the next in line? Belgium, or even France? The politics of scapegoating the weak European countries has so far worked for the Grande Nation. It kept a government that has increased its debt by half a trillion euros in the last five years from becoming the center of the market’s attention. This could change rapidly. Moody’s has put France’s AAA credit rating under review. In case of a downgrade, President Sarkozy, who faces elections in May, could be the next casualty of the euro crisis. If such a scenario came true, the weak politicians would obviously blame the markets.
But remember: The euro was conceived as a political project, not an economic one. Thus, if the euro fails, it will be a failure of politics, not economics. Finding scapegoats and blame-gaming wouldn’t help then.
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