The two Greece problems and the impossible way forward

Following the news about Greece and its European “partners” is better than any reality show. I’d have a great time if it weren’t so serious.

As I see it, two problems need to be solved:

  1. The amount of money that Greece owes cannot possibly ever be repaid. It’s far too much relative to the size of Greece, and did anybody mention they have a 25% unemployment rate? Whose work is supposed to create the GDP that can pay for the debt?
  2. The Eurozone has been constructed in a way so that Greece (and some other countries) cannot sustainably earn more than it spends, while some other countries (like Germany) always earn more than they spend. If this isn’t resolved, even a 100% haircut on the debt will not solve anything because a few years later, we’ll be right back where we were.

Mr Yaroufakis explains this extremely well, and asks everybody to make sure that whatever proposals are being floated, they adress both issues.

The trouble is this:

  • The European “partners” cannot agree to #1, because if they did, they would thereby admit to their own national populations that they wasted 100’s of billions of dollars of their citizen’s wealth on something that could never have worked. Nobody likes to declare themselves incompetent (and therefore unelectable the next time) and so it won’t happen.
  • The countries that have funded Greece’s debts (e.g. Germany) won’t agree to #2, because they are the ones benefitting handsomely from the same arrangement! The reason German uneployment is at a record low is the same reason that Greek unemployment is at a record high. No national politician will willingly increase their own country’s employment (or decrease its wealth) for some other country’s benefit.

So now, “Rock — meet hard place”. Something’s gotta give. Personally, I think the most likely outcome is some kind of fudge that papers over things for a few more months, but then by the fall, Spain is going to vote in the “wrong” party and so forth and so forth, negotiated compromise will be harder and harder, and the Euro area will break apart.

This will the Greeks allow to simply repudiate all debt payments and institute whatever policies they like, and the Germans establishment to point fingers at the Greeks for breaking contractual agreements. In particular, it will allow the European/German political establishment to deflect any responsibility for having handed out the money in the first place. “It’s those bad Greek extremists that don’t live up to their commitments.”

Note that in this case, Germany will still lose all the money that they otherwise could have written off in a controlled fashion, and their economy will not do as well going forward in the long term precisely because Greece is going to do better. So why all the drama? And all the unmanageable consequences in the singularity between rock and hard place?

Politicians wanting to stay in power, that’s all. Sad.

P.S. And I’m sure personal animosity will also play a role. After all, Varoufakis-the-man questions everything your typical career politician or bureaucrat stands for, as in these choice quotes from a recent interview: “Power is something I don’t want to have, generally speaking.” and “I value debates and Socratic dialectics. The whole point of a discussion is to learn from one another. But just look at politicians debating in parliament or on television – it’s all about annihilating and destroying their opponents. If that happens to me then somebody should shoot me.”