Greek Finances Won't Split EU or Destroy Euro

In the last couple of weeks, the press has been full of speculation about what the shaky state of Greece's finances mean for the European Union and the euro. The situation is serious, but as usual, the hysteria is overblown. The EU has been too successful for its members to let this matter undermine it.

The most recent figures from the European Commission are for 2008. Then, Greece had a public debt of € 237 billion, which was 99.2% of its GDP. Its budget deficit has been about 13% of GDP since then. The Commission believes that spending cuts are needed to avoid seeing the ratio hit 125% this year and 135% next year. Things got worse today when Greek experts informed the parliament that they had "found" € 40 billion in hidden debt stashed away by previous financial authorities.

The Greek Prime Minister, George Papandreou, said on TV today, "Greece is in the center of a speculative game aimed at the euro. We are the weak link in the euro zone. We must act immediately and decisively." He then went through a list of tax increases and spending cuts. The bond market was unimpressed, and the 10-year Greek bond dropped with its yield rising to 6.75%.

However, the Greek situation is not going to unravel the euro. Greece is too small an economy within the eurozone to be able to do that. A country like France or Italy with problems like those of Greece would be a different matter.

Furthermore, the Europeans don't want any nation to be forced out of the eurozone. Stepping in and out of a currency as if it were a bathtub is not conducive to trade with one's neighbors. Greece exiting the euro is too expensive and disruptive to contemplate. The big economies of Europe will subsidize Greece if need be. The political risk is effectively zero.

Editor's update: Since posting this, Reuters has run a story quoting Nobel laureate Joseph Stiglitz as saying much the same thing. And he makes an excellent point in saying "in the case of speculative attack, an announcement that Europe will stand by Greece or Spain would not require any money. It just requires a statement of solidarity."

© Copyright 2010 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

Kensington Review Home