Martis BuchholzSalvador RodriguezJoseph Warren

Greece: Resolving the European Crisis

Greece proposes a two-part European reform to fulfill our common values of justice and

equity, and further our shared interest in prosperity and economic growth. First, Europe

must have a monetary policy to benefit all of Europe. Second, we have an opportunity

to further the European project by issuing Eurobonds. We believe these two reforms are

necessary for a successful joint response to the current depression. Addressing, respectively,

monetary imbalance and fiscal crisis, they benefit Europe as a whole and—in that Europeans

rise or fall together—every country in Europe.

Monetary policy for all Europe

By joining together within a common currency, the nations of the Eurozone engaged in a

fundamental commitment: a shared inflation rate. Unfortunately, certain groups within

Europe have used their central position to weight monetary policy to their own benefit.

Depression and high unemployment in much of Europe call for an expansionary monetary

policy. To this end, Greece supports an amendment to the charter of the European Central

Bank (ECB) to allow the ECB to respond to changes in unemployment.

Europe is probably not an Optimum Currency Area, but break-up at this point would

have serious negative consequences. We are all in this together. Economists at Barclays

Capital estimate the Greek government owes other members of the Eurozone over $370 billion

( 3% of total Euroarea GDP). Additionally, Greek firms and individuals were indebted to

about $69 billion to international banks. In the event of a Greek default, the likelihood of

these funds being repaid would shrink dramatically. A default would also create uncertainty

in the Euro’s future, especially for specific countries. This will increase bond prices, and

lead to further (substantial but unknowable) monetary costs (Economist 2012).

Since the origins of the Eurozone, Germany has leveraged its political power and eco-

nomic strength to shape European monetary policy in its own interest (a counter-factual

Deutschmark would likely follow much the same policies the Euro is tied to today). This

self-interested policy has (generally) worked great for Germany, as evidenced by their decade-

long export boom. Yet the low-inflation policy harms other countries sharing the Euro. As

history shows (figure 4), Greece does not have an inherent balance of payments problem.

A devaluation of the Euro would decrease real wages and the price of goods in Southern

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countries, increasing economic competitiveness. This economic boost would relieve the im-

mediate crisis facing struggling European countries, allowing these countries to work to

address long-term issues.

Europe needs a monetary policy that is different from what Germany’s optimal policy

might be. This will increase European growth and ultimately help Germany as well, by in-

creasing trade and demand for German goods. Germany is not an island—general European

prosperity is in the German interest. In order to maintain the economic benefits the Euro

has brought Germany over the last decade, all of Europe must attain economic growth. If

this does not happen, as the last few years demonstrate (figure 1), the German economy will

fall with the rest of Europe.

Eurobonds

The current approach advocated by major creditors such as Germany has failed to alleviate

the crisis in both Greece and the Eurozone. Significant uncertainty remains and crippling

austerity measures have stifled economic growth. In order to restore balance and unity

to the Eurozone, there must be a common approach to resolving our debt problems. It

is thus proposed that Brussels issue Eurobonds to all member nations to mutualize debt.

This would allow nations in fiscal turmoil breathing room to govern their respective nations

without lingering debts.

This proposal will help Greece out of its currently unstable situation for the following

reasons: First, the Greek government has already undertaken significant austerity. These

measures have contributed to a crippling 25% unemployment rate, considerable unrest, and

an imploding economy. On November 8th, the Greek government slashed salaries for hospital

employees, teachers, air-traffic controllers, and public-transit workers, by as much as 35%.

Greece has taken steps raising the retirement age, and has pledged to cut 25,000 public

sector jobs. As figures 9 and 10 show, Greek laborers already work more hours and retire

later than those of most other Euro-area countries. And these reforms fall heaviest on the

poorest Greek citizens.

Second, the Greek government and the Eurozone require stability and a restoration of

economic certainty. There have been numerous bank runs in Greece. In order to restore

economic vitality in the Eurozone, member nations should agree to collectivize debt so that

those nations most vulnerable to default are able to rebuild. On October 25th, the Greek

central bank reported that deposits held by domestic residents and companies rose by 0.9

billion euros in September to EUR154.33 billion from EUR153.39 billion in August. This is

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significantly lower than the 238 billion euros in deposits held in September 2009. Since then,

bank deposits have been in free-fall. The deposits fell to 174.2 billion euros by the end of

2011, down 16.8% from 209.6 billion euros in 2010. This is a substantial problem for Greece’s

banking sector as well as the entire national economy. Greek bank deposits fell by 5% in

May of 2012 amid fears of Greece exiting the euro. Mutualizing debt would ease concerns of

a potential Greek exit from the Eurozone, improving economic conditions by that alone.

Third, the current regime mandating austerity measures and attaching punitive interest

rates to IMF loans are restricting economic growth in Greece. The most recent data indicate

that this approach will ultimately fail to achieve a debt to GDP rate of 120% by 2020.

Reuters recently reported that, “Inspectors from the European Commission, the European

Central Bank and the International Monetary Fund together known as the troika have been

in Athens on and off since July trying to establish whether Greece will ever be able to pay

back everything it owes.” (Strupczewski 2012)

As Table 1 (from the IMF) shows, there are a variety of specific Eurobond proposals, with

different conditions and expected effects. While Greece is open to working out a plan that

is best for all nations within the Eurozone, certain considerations must be made regarding

the feasibility of varying proposal elements given Greece’s current political and economic

conditions. Sacrificing citizens’ democratic decision-making is political unviable in Greece,

and we expect that citizens of other countries will have similar concerns. We cannot let

conditions set on issuing Eurobonds exacerbate our dangerous internal political situation,

with the rise of both fascism and the far left, riots, and general social unrest.

As previously argued, the current approach has failed to put Greece and the rest of the

Eurozone on the track to economic restoration, thus far only aggravated uncertainty amid

a rising debt-to-GDP ratio in Greece. With an average sovereign debt of 90% of GDP,

the stability of our common currency and the long-term vitality of the Eurozone economy

necessitate the participation of all nations in reducing our collective debt.

Benefits

Reforming the ECB and issuing Eurobonds are reforms intended to benefit all of Europe.

The current depression exacerbates long-term problems, such as sovereign debt, and limits

county’s capacities to respond in a beneficial way. Thus, these proposed reforms pave the

way for European economic growth, and if enacted can make addressing other issues Euro-

pean face much more feasible.

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Germany

As Figure 1 shows, Germany’s fate is tied to that of the rest of Europe. This has been made

even more evident recently as Germany’s economy slows.

German industrial output fell more than forecast in September and the govern-

ment’s economic advisers said the economy would grow by just 0.8 percent this

year and next as Europe’s largest economy gets dragged deeper into the euro

zone crisis. . . . Wednesday’s data added to the gloom, showing that industrial

production dropped by a hefty 1.8 percent on the month in September, well below

the consensus forecast in a Reuters poll for a 0.5 percent drop. (Reuters 2012)

Like the rest of Europe, Germany needs pro-growth policies in Southern Europe. Poverty

on the “periphery” will affect trade throughout the continent.

Indebted countries

Austerity and fiscal consolidation hurt impoverished workers hardest, and make little differ-

ence for long-term solvency except to increase depression. By enhancing economic turmoil,

these policies make repayment of the debt less likely and much more painful. For example,

Spain has a forecasted unemployment rate of 26.6% next year, along with vast protests and

an emerging secessionist movement. Converting some of this debt into Eurobonds would

enable Spain to overcome this depression, rather than spiraling towards poverty and disin-

tegration.

Greek crisis

According to the IMF (2012), Greece has made substantial progress towards stabilizing its

cyclically-adjusted deficit (Figure 2). However, the continued austerity packages are harming

Greece’s economy, inciting political turmoil, and inhibiting our capacity to rebuild our coun-

try and repay the debt. According to recently released numbers, the Greek unemployment

rate has risen to 25.4%, a record since monthly data began being published by the Hellenic

Statistical Authority. Of these, youth (15-24) unemployment has doubled since August 2009

from 24.3% to close to 60%. Amid economic collapse, Greek debt is forecast to increase to

189% of GDP from 176% in 2012 (Bloomberg 2012).

Greece is estimated to have lost 1/5 of economic output since 2008, and the depression

has directly resulted in widespread political extremism. Particularly unsettling is the rising

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popularity of the militaristic, neo-Nazi party, Golden Dawn. Of course, the main opposition

party in Greece, the Coalition of the Radical Left (SYRIZA), is lead by a former communist.

With the economy set to shrink even more (-6% in 2012, -4.2% in 2013), we continue to

be very concerned about the snowballing political crisis. This past week (Nov 7-8), at

least 80,000 Athenians violently protested a 13.5 billion euro ($17.3 billion) package cutting

pensions and salaries, and increasing taxes. The protest occurred amid a 48-hour general

strike, in which government services, as well as hospitals, banks, pharmacies, taxis, and buses

stopped functioning (AP 2012).

So this is Europe’s choice: either come together to resolve member-country’s debt prob-

lems in an effective way, or allow depression and political chaos to take us back to the 1930s.

As discussed above, the costs of not reforming European institutions is at least around 300

billion euro. This is a lower bound on how much the remaining members of the Euro area

will have to pay in the event of Greek collapse. To avoid this terrifying scenario, Europe

invest in European institutions. This will aid impoverished citizens in Southern and Eastern

Europe and lay the foundations for economic growth. It will be considerably less costly than

the calamitous alternative.

References

[1] Fiscal monitor: Taking stock: A progress report on fiscal adjustment. International

Monetary Fund (October 2012). http://www.imf.org/external/pubs/ft/fm/2012/

02/fmindex.htm.

[2] Paths to Eurobonds International Monetary Fund (July 2012).

[3] Natalie Weeks and Maria Petrakis, Greek protests turn violent

in Athens as Samaras seeks austerity. Bloomberg News (Novem-

ber 7, 2012). http://www.businessweek.com/news/2012-11-07/

greek-protests-turn-violent-in-athens-as-samaras-seeks-austerity.

[4] Marcus Bensasson, Greek unemployment rate increases as recession deepens. Bloomberg

News (November 8, 2012). http://www.businessweek.com/news/2012-11-08/

greek-unemployment-rate-increases-as-recession-deepens.

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[5] Michelle Martin and Sarah Marsh, German economy sputters as euro zone crisis

bites. Reuters (November 7, 2012). http://www.reuters.com/article/2012/11/07/

us-germany-economy-idUSBRE8A61A620121107.

[6] Ambrose Evans-Pritchard, Greek death spiral raises heat for

German-bloc creditors. The Telegraph (October 31, 2012).

http://www.telegraph.co.uk/finance/financialcrisis/9647098/

Greek-death-spiral-raises-heat-for-German-bloc-creditors.html.

[7] Melissa Eddy and Nicholas Kulish, A war of words over the euro crisis. The

New York Times (May 18, 2012). http://www.nytimes.com/2012/05/19/world/

europe/a-war-of-words-between-greece-and-germany-over-euro-crisis.html?

pagewanted=all&_r=0.

[8] Nektaria Stamouli, Greek bank deposits rise in september as confidence improves.

The Wall Street Journal (October 25, 2012). http://online.wsj.com/article/

BT-CO-20121025-714943.html.

[9] Marcus Bensasson and Christos Ziotis, Greek Bank Deposits Shrank 5.2% in May on

Euro Exit Fear. Bloomberg News (June 29, 2012). http://www.bloomberg.com/news/

2012-06-29/greek-bank-deposits-shrank-5-2-in-may-on-euro-exit-fear-1-.

html.

[10] Cutting up rough: How much do Greece and the rest of Europe stand to lose? The

Economist (May 2012). http://www.economist.com/node/21555923.

[11] J́’org Bibow, The euro debt crisis and Germanys euro trilemma. Levy Economics Insti-

tute of Bard College. Working Paper No. 721 (May 2012).

[12] Derek Gatopoulos, Greece narrowly passes crucial austerity bill (November 7,

2012). http://www.boston.com/2012/11/07/entry-cont/AvrtG07qGyeJ2H7j6nf8GK/

story.html.

[13] Jenny Paris, Greek Parliament Employees Vote With Their Feet. Wall Street

Journal (November 8th, 2012). http://blogs.wsj.com/eurocrisis/2012/11/08/

greek-parliament-employees-vote-with-their-feet/.

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[14] Jan Strupczewski and Luke Baker, IMF and EU face tough choices on Greece.

Reuters (November 8th, 2012). http://www.reuters.com/article/2012/11/08/

us-eurozone-greece-troika-idUSBRE8A710A20121108

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Figure 1: While Germany may be doing better economically relative to other Europeaneconomies, Europe must find common solutions to address our shared crisis. http://www.

economist.com/node/21560601.

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Figure 2: “The cyclically adjusted primary balance (CAPB) needed to stabilize debt is theCAPB required in 2020 to allow the debt-to-GDP ratio to return to 2011 levels by 2030,”IMF 2012. Note Greece’s substantial progress in stabilizing its budget.

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Figure 3: Capital inflows in Southern Europe lead to a balance of payments problem andovervaluation of the currency (IMF).

Figure 4: Long-term competitiveness could be improved through currency devaluation (Eu-rostat).

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Figure 5: The collapse in bank deposits indicates the extent of Greek economic uncertainty.

Figure 6: From the IMFs “Fiscal Monitor,” showing total budget deficits adjusted for interestpayments absent the recession.

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Figure 7: Protest of 50,000 Greeks outside Parliament, Nov. 2012, opposing austerity andthe bailout agreement. (Telegraph 2012)

Figure 8: Petrol bomb explodes in front of parliament while austerity package scrapesthrough Parliament.

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56  57  58  59  60  61  62  63  64  65  

Malta  

France  

Luxembourg  

Italy  

Austria  

Belgium  

European  Union  

Germany  

Netherlands  

Finland  

Greece  

Estonia  Spain  

Cyprus  

Portugal  

Ireland  

Average  exit  age  from  labor  force  

Figure 9: Average exit age from labor force, 2005. “The indicator gives the average exitage from the labour force, weighted by the probability of withdrawal from the labour mar-ket,” Eurostate, structural indicators, http://www.eurofound.europa.eu/ewco/studies/tn0702028s/tn0702028s_5.htm.

0  

500  

1000  

1500  

2000  

2500  

Greece  

Estonia  

Slovak  Republic  Italy  

Portugal  

Spain  

Finland  

Luxembourg  

Austria  

Belgium  

Ireland  

France  

Germany  

Netherlands  

Average  annual  hours  actually  worked  per  worker  

Figure 10: Estimated total working hours for workers in Eurozone countries (OECD 2011)

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Figure 11: Unemployment in Europe (Eurostat 2012).

Figure 12: Country incentives associated with different Eurobond proposals (IMF 2012b)

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