MUNICH – The euro’s current weakness has one culprit: Greece. At 14% of GDP, Greece’s latest current-account deficit was the largest of the euro-zone countries after Cyprus. Its debt-to-GDP ratio stood at 113% by the end of 2009. As this year’s deficit is projected to be more than 12% of a shrinking GDP, the debt-to-GDP ratio will soar above 125% by the end of 2010, the highest in the euro zone.
Investors have reacted by trying to get out of the euro and, in particular, steer clear of Greek government debt. Greece had to offer them increasingly higher interest rates to stay put. In January, the interest premium was 2.73 percentage points relative to German public debt. If this premium prevails, Greece will have to pay €7.4 billion more in interest per year on its €271 billion debt than it would have to pay at the German rate.
The problem is not only the premium itself, but the imminent risk that Greece will not be able to find the €53 billion it needs to service its debt falling due in 2010, let alone the estimated additional €30 billion to finance the new debt resulting from its projected budget deficit.
The Greek disaster was possible because its government deceived its European partners for years with faked statistics. In order to qualify for the euro, the Greek government asserted that its budget deficit stood at 1.8% of GDP in 1999 – well below the 3%-of-GDP limit set by the Maastricht Treaty.
That figure, we now know, had no basis in reality. After euro banknotes with Greek motifs had already been printed and distributed, Eurostat, Europe’s statistics agency, reported that Greece’s deficit had actually been 3.3 % of GDP in 1999. Yet the revised number was also overly generous, and Eurostat later withdrew it.
Today, no official figure on the budget deficit in 1999, the year on which the EU based its decision about Greece’s entry, is available. Reports issued by Greece in 2009 were similarly misleading, jumping from 5% of GDP to 12.7% after Eurostat had a closer look.
Indeed, the official figures were so unreliable that Eurostat felt forced to express “reservation on the data reported by Greece due to significant uncertainties over the figures notified by the Greek statistical authorities” – a stiff rebuke in bureaucratic language. So what Greece got exactly is what it sought to avoid with its dodgy data: the rise in interest-rate spreads for Greek state bonds.
This trickery allowed the Greeks to have several good years. Since entering the euro zone in 2001, social-welfare expenditures increased at an annual rate that was 3.6 percentage points higher than that of GDP growth. According to OECD statistics, pensions in Greece, available after only 15 years of work, reach an incredible 111% of average net incomes. By contrast, in Germany the average pension level is about 61% of average net earnings for people who have worked at least 35 years. The Greek attempt to create a land of milk and honey by excessive borrowing is hair-raising.
If no support comes from abroad, Greece will have to announce a formal debt moratorium, thereby declaring that it will only service part of its debt, as was done by Mexico and Brazil in 1982 and Germany in 1923 and 1948.
The other euro-zone countries, however, will not let Greece go under, because they fear a domino effect similar to the one triggered among banks by the collapse of Lehman Brothers in 2008. If Greece went bust, investors from all over the world would lose their trust in the stability of the weaker euro-zone members, primarily Ireland, but also Portugal, Italy, and Spain.
If these countries became insolvent and curtailed their expenditure, a new worldwide recession would be likely. Of course, the EU countries could leave Greece to the mercy of the International Monetary Fund, which is willing and able to help – conditional on the government’s implementation of a strict austerity program. But many euro-zone politicians regard turning to the IMF as a sign of weakness and prefer their countries to shoulder the burden themselves.
Another reason why help will likely come from euro-zone countries is that they would bear a substantial share of the Greek losses anyway. Greece’s public debt was placed in its own banking system, which is indebted to the European Central Bank via the issuance of euros. If the Greek state goes bust, so will Greek banks, and the ECB would have to write off its claims against them, taking a charge of roughly €6 billion. As the ECB belongs to all euro countries, they would all bear the loss.
Helping Greece is easier said than done, as the European Union has no mandate to take such a step. On the contrary, Article 125 of the Maastricht Treaty explicitly excludes bailouts, stating that neither the Union nor its member states are liable for the commitments of EU governments. Indeed, some countries insisted on the no-bailout clause as a condition of their participation in the euro, fearing that Europe’s debtor countries could, by majority voting, expropriate the thriftier countries, thereby generating moral-hazard effect that would undermine the stability of the EU.
That concern remains no less valid today. Thus, only bilateral help seems possible, perhaps coordinated by the EU and coupled with strong supervision of the Greek budget and Greece’s statistical office. The Greek statistical office has already been severed from the government, and Eurostat will have the right to oversee Greece’s official statistics directly.
Similarly, Greece will lose its sovereignty insofar as the EU will now directly control all budget-relevant decisions of the Greek government. This spring, before the first big issues of new Greek debt must be launched, the world will see which solution Europe has chosen.