It’s time to stop kidding ourselves about Greece. On the third anniversary of the Lehman Brothers collapse, the heavy brigade—the Federal Reserve, European Central Bank, Bank of England, and Japanese and Swiss central banks—moved decisively on Sept. 15 to avert a liquidity crisis in European banks that, as Greece heads for Hades, has found American investors understandably leery about lending greenbacks to banks with hefty portfolios of Greece’s worthless bonds. Between now and Christmas, the big five will hold joint auctions, providing unlimited quantities of dollars.
Coming in the wake of collapsing E.U. bank stocks and a Moody’s downgrade of two of France’s biggest banks, this display of firepower was a stout, badly needed riposte to the feckless Micawberism in eurozone capitals. The central banks are arming the financial world against the Greek default that everyone—other than (if you credit what they said as late as last Wednesday) Angela Merkel, Nicolas Sarkozy, and George Papandreou—now expects.
In Wonderland, the White Queen told Alice that believing “six impossible things before breakfast” is quite in order; but in Europe it is not. Over the past 18 months, the fiction that chronically dysfunctional, spendthrift Greece could, even with massive handouts, reform its way back to economic health has cost Europe’s taxpayers billions that would have been better spent on offsetting the costs of an early and orderly write-down of the unpayable debts of a country of little importance. Worse still, the political pussyfooting over Greece has cost governments vital credibility at home and abroad and magnified the risks to the euro that they sought to avoid.
If the idea was that pouring money into Greece would divert attention from Portugal, Spain, or Italy, the strategy backfired: financial markets reasoned that if politicians lacked the courage to face the facts in Greece, what confidence could there be that peer pressure would compel Italy and Spain to put their appalling finances in order, starting with taking a wrecking ball to demolish their extravagant publicly funded networks of political patronage? The more Merkel and Sarkozy insist that Greece’s future lies squarely within the eurozone, the more they put the euro at risk.
Contagion has now reached the Rhine and is mightily roiling German politics, making it uncertain whether Merkel can even get the second Greek bailout through the Bundestag. That is by now, however, all but irrelevant because in Greece itself, the game is up. Its economy is collapsing, the interest bill on its soaring debt will absorb a quarter of state revenue next year, and the taxmen who should be collecting around €40 billion in unpaid Greek taxes are all but on strike. Reforms have been woefully timid but are still bitterly resented. The vaunted sale of state assets has never left the drawing board, a run is developing on Greek banks, and unless the E.U. and IMF cough up the next €8 billion within a fortnight, Athens will run out of cash to pay next month’s bloated public-sector salary bill. In a desperate throw of the dice, the government has announced a property tax to be paid through domestic electricity bills—which the mighty electricians’ union has said it will refuse to collect.
The only uncertainties now are the terms of a Greek default, what the wider damage will be, and how to limit it. The fact that politicians have painted default as an unthinkable catastrophe does not help. It will be messy—yet no less messy than the political confusion that has stymied decisions for the past 18 months.
Writing down Greek debt by, say, 60 percent would saddle the European Central Bank with a big bill; create holes in the balance sheets of some big French, German, and Belgian banks; and, to an unknown extent, expose British and American holders of credit default swaps. Not only Greek but Romanian and Bulgarian banks could collapse, while Cyprus’s exposure to Greek debt is 156 percent of its GDP—and Russia holds massive deposits in Cyprus. But as Timothy Geithner has observed, the eurozone is not exactly penniless, and should be able to recapitalize banks that need it. The harder task will be to calm the European bond market, starting by providing Ireland and Portugal, which are in the recovery ward, with sufficient liquidity to ride out the storm. The European Central Bank will also need to buy Spanish and Italian bonds—but on the condition that their pampered politicians take the sort of steps Italy balked at this summer, notably the total abolition of Italy’s pointless and costly layer of provincial government.
The biggest risk is political. Rather than buckle down to restoring confidence, Europe’s politicians are bent on another time-consuming redesign. José Manuel Barroso, the European Commission president, asserts that the “fight for the economic and political future of Europe” requires “a new federal moment.” What nonsense: it requires apologies to the eurozone’s furious voters. The Greek debacle is the result of joining together incompatible economies. The 19th-century Latin Monetary Union embracing France, Italy, Spain, and Greece collapsed when the Greeks (and the pope) were caught debasing the common silver coinage, and the world did not end. The euro cannot be dismantled without huge danger, in today’s turbulent conditions, but its long-term future is another matter. The colossal resentments generated by euro membership, in its debtor and creditor members alike, pose the real threat to Europe as an ideal. Eurozone turmoil is a headache the world did not need. But headaches are seldom fatal.