Reining in Europe’s Debtor Nations

MUNICH – The eurozone countries have now agreed to provide some €80 billion in cheap loans to Greece over the next three years, and hope that the International Monetary Fund will provide another €15 billion at the least. But the interest rate that Greece must pay buyers of its government bonds has shot up to a record-high level of nearly 9% – 5.9 percentage points above the benchmark rate paid by Germany. That translates into an additional €16billion per year in interest payments on Greece’s current debt of €273 billion. Obviously, markets still believe that Greece will default on its debt.

Greece, moreover, has another huge problem: its current-account deficit is currently a whopping 13% of net national income, which means that €27 billion have to be financed annually by borrowing or selling Greek assets. With international investors no longer willing to finance this deficit, and even shying away from refinancing existing Greek debt, only three possibilities remain.

The first is that the European Union provides the necessary funds on a permanent basis, creating a “European Transfer Union” to the benefit of the deficit countries, including Portugal, Spain, Ireland and Italy. The second option is for Greece to go through a depression, reducing its wages and prices. Finally, Greece could leave the euro and devalue its currency.

All three of these options are painful, albeit for different reasons. The first is unbearable for the more stable EU countries, because it would deprive them of their wealth and suck them into a dangerous fiscal maelstrom. The second would lead to even more riots in the streets of Greece, with unforeseeable political consequences. And the third would destabilize the euro, possibly resulting in a run on some other EU countries. As all the possible options are bad, the situation qualifies as a veritable Greek tragedy such as those hitherto seen only on stage.