Greece's financial woes and the future of the euro

Economists Paul Krugman (A Money Too Far New York Times 05/06/10) and Barry Eichengreen (The Greek crisis: It is not too late for Europe Berkeley Blog 05/07/10) discuss the latest on the Greek crisis.

Krugman thinks the euro could take a big hit as a currency over the Greek crisis:

So how does this end? Logically, I see three ways Greece could stay on the euro.

First, Greek workers could redeem themselves through suffering, accepting large wage cuts that make Greece competitive enough to add jobs again. Second, the European Central Bank could engage in much more expansionary policy, among other things buying lots of government debt, and accepting — indeed welcoming — the resulting inflation; this would make adjustment in Greece and other troubled euro-zone nations much easier. Or third, Berlin could become to Athens what Washington is to Sacramento — that is, fiscally stronger European governments could offer their weaker neighbors enough aid to make the crisis bearable.

The trouble, of course, is that none of these alternatives seem politically plausible.

What remains seems unthinkable: Greece leaving the euro. But when you’ve ruled out everything else, that’s what’s left.

This result wouldn't put an end to the euro or the European Union. But it would be a body blow to both.

The euro is currently structured to lock in neoliberal policy directions. Without the ability to devalue its currency, Greece is forced into severe austerity measures which will hurt the general population there in a serious way. That also means they are locked into the Herbert Hoover economics of slashing public spending severely in the middle of a recession, when a sensible anti-recession policy would be doing just the opposite.

While I'm not as much of an EU-skeptic as Krugman seems to be, he does have a good basic point. If Europe wants to avoid this kind of neoliberal death-trap for national economies like Greece right now, it will have to have much more of a common tax and economic policy and the political authority to enforce it.

Under both the Clinton and Cheney-Bush administrations, the United States encouraged expansion of the EU, with the Clinton administration seeing it as kind of a development program for eastern Europe after the collapse of the Eastern Communist governments and economies, and the Bush administration seeing it as a way to weaken Europe as a world political force. Neither policy was necessarily in the long-term best interests of the United States.

At the moment, the EU looks more in the latter situation. Their expansion before establishing more effective central governing structures sure looks like a mistake right now.

But neither Europeans nor Americans have reason to be indifferent to the weakening of Europe and the EU. The "European project" has been one of the most important advances for democracy and world peace that we've ever seen. Having it dissolve into national rivalries would be a tragedy not only for them but for the world.

Tags: european union, greece