Text size:

  • Small
  • Normal
  • Large

Greece should look to Germany not Houdini for answers

A good crisis should never be wasted. But by doing everything in their power to help Greece to avoid defaulting on its debt, that is precisely what the euro zone and the IMF are doing - writes James Doran

A good crisis should never be wasted.

But by doing everything in their power to help Greece to avoid defaulting on billions of dollars in debt, that is precisely what the masters of the euro zone and the IMF are doing.

A financial crisis of this magnitude, one that has grown in ferocity and scope since it first appeared in the US housing market some four years ago, requires an equally fearsome remedy.

There is no easy way out. Yet, to see the Greek parliament this week vote for tax increases, spending cuts and more loans from the IMF and Brussels, you would think the embattled nation had discovered the lost secrets of Houdini.

The Greek parliament on Wednesday approved an austerity plan that allowed the country to be granted the next 12 billion (Dh44bn) tranche of bailout loans from the EU and the IMF. Without those funds Greece would have been forced to default on its debt within weeks, it was said.

The measure included some 28bn of spending cuts and tax increases for the next five years - a high price to pay as such burdens on companies and individuals are at best likely only to inspire further recession, not the kind of dynamism Greece needs to grow its way out of trouble.

More than 50,000 Greek businesses went bankrupt last year - squeezing those that are left even harder will doubtless force thousands more to the wall.

The austere terms of the deal aside, a bailout is no cure for an economy in such dire straits.

Indeed, to even talk about a bailout is to ignore the reality that Greece cannot pay its debts under the original terms and has had to seek outside help. It has defaulted in all but name.

In fact, the 110bn programme has more in common with a Ponzi scheme than an economic solution and is making the country's problems only worse. Greece is borrowing 110bn from Europe to meet repayment requirements on some of its 350bn or so of debt. In so doing it is digging an even deeper hole while condemning generations of Greeks to a future defined by economic misery.

To draw another parallel with the American end of the economic crisis, Greece is like the hapless subprime mortgage holder at the height of the housing bubble who remortgaged time and again to meet payments and avoid losing the house. But, in actual fact, the house was lost the day the deed was signed.

Those irresponsible mortgage holders were living beyond their means just as Greece has been since it scraped into the euro zone by the skin of its teeth in 2000. Greece has to find its true place in the global economy. It is a small country with unemployment running at about 15 per cent. GDP stands at about 310bn or so and gross external debt at more than 530bn. That massive debt to GDP imbalance is where the problem lies.

What we are seeing in Greece today, and what we are trying to ignore in Spain, Portugal, Italy and Europe's other economically weak nations, is failure caused by a complete disregard for the perils of excessive debt.

And we have been disregarding them for centuries.

Niall Ferguson, the historian, has pointed out that Greece - and the other euro failures - have been dodging debt bullets for more than 200 years.

Since 1800 Greece has defaulted on its debts on five occasions, and has spent a total of 51 years in the past two centuries dealing with the ramifications of default.

Portugal is as bad. The country has defaulted six times in that period but fares slightly better than Greece at dealing with the problem as it spent only 11 years cleaning up after itself.

Spain, though, is the worst offender in the euro zone, with 13 defaults since 1800 and 24 years of debt-induced doldrums.

It seems some never learn and it is about time they did.

Greece needs to leave the euro, default on its debt and redenominate in drachmas - its pre-euro currency - forcing creditors to take a massive haircut. Otherwise it will never get straight. Such a solution is perhaps even more important for the rest of Europe, which will be dragged further and further down by the likes of Greece if they remain joined at the hip.

Europe has not been faced with this sort of economic disaster since the end of the Second World War. Then, Germany was allowed to default on its debt and forgo reparations and so start from scratch economically. And look how it prospered.

If Greece is forced off the bailout drug and into debt default rehab - no walk in the park admittedly - perhaps it could become a similar economic success story in a generation or two.

Only then would we be able to say the crisis has been well spent.

jdoran@thenational.ae

Back to the top

More articles


Editor's Picks

 The Greens, villas: Q1 no change. 3BR - Dh210-250,000. 4BR - Dh210-260,000. 5BR - Dh220-300,000. Q1 2013-Q1 2014 5% rise. Pawan Singh / The National

In pictures: Where Dubai rents have risen and fallen, Q1 2014

Find out how rental prices in the prime locations in Dubai have altered during the first three months of the year and the current rates you will pay according to data provided by Asteco.

 Miele coffee maker making Cappuccino at Miele Gallery in Sama Tower in Dubai. The cost of this coffee maker is around Dh 17,000. Pawan Singh / The National

Space-age coffee comes at a price from Miele

Miele have taken the coffee machine to a new level with its Dh17,000 offering that is built into your kitchen.

 The bridge of Seajacks Hydra, as the wind farm installation vessel undergoes finishing touches and testing works at Lamprell’s Hamriyah facility in Sharjah before its planned delivery on June 2, 2014. Jeffrey E Biteng / The National

In pictures: Building the Seajacks Hydra

The Seajacks Hydra, a wind farm installation vessel, is undergoing finishing touches and testing works at Lamprell’s Hamriyah facility in Sharjah before its planned delivery on June 2, 2014.

 The Wind, Energy, Technology and Environment Exhibition takes place from April 14 to April 16. Above, the Dewa showroom during last year’s Wetex. Jaime Puebla / The National

April corporate and economic calendar for the UAE and overseas

From Cityscape to Wetex to stock-market holidays to nations reporting first-quarter GDP figures, here is our helpful calendar of April's business events in the UAE and internationally.

 The rush of new supply of hotel rooms pushed Dubai occupancy rates down to 87 per cent. Sarah Dea / The National

Dubai hotel room rates rise 10 per cent

The rush of new supply pushed occupancy rates down to 87 per cent, a dip of 2.6 per cent from the previous year. Winter months are the strongest for Dubai hotels, with occupancy and prices falling to half their peaks by July.

 Get the latest information on credit cards, bank accounts and loan products in the UAE. Mark Lennihan / AP Photo

Rates report: Latest on UAE loans, accounts and credit cards

Souqamal.com brings you the latest interest rates on banking products in the UAE.

Events

To add your event to The National listings, click here

Get the most from The National