Greetings From Athens
Sam Chandan Nov. 21, 2012, 7:15 a.m.
I am writing this week’s column from above the Atlantic, en route to Athens for a firsthand update on the euro zone’s recalcitrant mortal threat. By the skin of its teeth, the Greek Parliament approved new and deeply divisive austerity measures last week. There have been howls of protest in the streets and from the left-leaning opposition. But if the vote had gone against Prime Minister Antonis Samaras, the entire program of support from the European Central Bank and the International Monetary Fund would have imploded, driving Greece from the common currency and threatening the cohesion of the monetary union.
Efforts to keep the euro zone intact may be well-intentioned, but the halfhearted approach of partial and temporary measures that has dominated other alternatives has only succeeded in magnifying the downside costs and delaying recovery. Europe has done itself a disservice in not acting decisively. With a lesson for the United States, that paralysis is proving a greater threat to long-term prosperity than the sovereign debt crisis itself.
Greece is in the spotlight, but it is hardly alone in its troubles or in its deleterious impact on its neighbors. Last week’s official announcement of recession in the euro zone was little more than a formality. Individual country reports have shown a clear pattern of weaker employment and investment activity, if not outright declines. As the sovereign debt crisis has moved from the periphery to the larger economies, widespread contraction has become inevitable.
The southernmost nations of Europe face stronger headwinds as they are forced to wean themselves from the massive apparatus of big government. Sharp cuts in public spending and transfer payments have slowed the pulse of the Mediterranean, where the public sector still accounts for an unsustainable share of activity. To the north, Finland and Germany may be the only countries to register even modest growth in 2013. In Greece, Ireland, Italy and Portugal, debt burdens already exceeding annual output are rising further as their economies shrink. The antithesis of American stimulus efforts, Greek spending cuts are dragging its people into a sixth year of contraction. Instead of growing itself out of its impossible position, Greece must contend with a shrinking pie and a larger slice devoted to debt service. Athens’s street riots reflect an economic crisis that carries existential implications.
The euro zone’s relapse into recession is not solely a result of unforgiving austerity measures. European policymakers’ astonishing level of inertia has been instrumental in subverting the climate for private investment. When government retreats to a smaller role, business and consumer activities can be aggrandized as the intended offsets. But no clear path to stability has been laid out for Europe’s weakest economies. That has stymied private-sector growth, exaggerating the downturn.
The chilling effect on business investment has impaired the value and liquidity of real assets. Where part of Greece’s planned return to stability calls for state asset sales of €50 billion by 2022, less than €2 billion has been raised through privatizations thus far.
If the euro zone is to survive in some form, it must become more integrated. In addressing the immediate challenges, integration will contain the borrowing costs of the most indebted economies through what amounts to a cross-subsidy from the wealthier nations. It need not have been this way. The dire straits are a function of dissembling. If the euro zone had acted when it held the balance of power in relation to bond markets, the outcome would have been less painful for its ordinary citizens.
But like the United States, Europe’s leaders never conceived a scenario where the market would one day turn against them.
Sam Chandan, Ph.D., is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.