What Can’t Continue, Won’t

Greece will leave the Euro. There is no choice really. But there is a level of schizophrenia in the Greek voter—apparently 80% want to stay in the Eurozone. Based on the last election most voters are against austerity. The two positions are not reconcilable without large loans from Germany. They will not lend. It is like the little girl who tells her father, “Give me the pretty moon Daddy.” Hysterical crying will follow. This seems to be the official Greek position. 

I do not usually agree with Martin Wolfe, a writer for the Financial Times. His latest article is no exception. But I think he is quite accurate in his portrayal of the consequences of the breakup. 

Start with Greece. It is in a doom loop. Unemployment soared from 7 per cent of the labour force in May 2008 to 22 per cent in January 2012, while the unemployment rate of people aged under 25 jumped from 21 per cent to 51 per cent. Worse, despite fiscal austerity and debt restructuring, the International Monetary Fund estimates that gross public debt will be 160 per cent of gross domestic product in 2013, 50 percentage points higher than in 2008. Moreover, the IMF forecasts that the current account deficit – the balance of trade on goods and services – will be more than 7 per cent of GDP this year.

I think this is accurate and inevitable. The rest of the article is a description of the various consequences of the crisis. In my view he is quite accurate. Have a look. (Note that sometimes links to Wall Street Journal or in this case Financial Times is behind a pay or registration wall. You can avoid this wall by Google. In this case Google “Martin Wolfe” and “permanent” and that will get you there. Do not feel guilty, the papers have designed their websites to allow this.) 

His conclusion is the main thing I disagree with. What can’t continue won’t continue. In this case the Germans cannot continue to loan Greece money. 

Greek exit then would create a choice between big moves to a stronger union and a future of endless crises. It is a choice the dominant creditor nation, Germany, must make – among big steps to integration that horrify many of its people, a future of horrible crises or a horrible break up right now. No good choices exist. But the eurozone must become a stronger union or it will disappear.

It cannot become a stronger union. Will Germans vote to increase their taxes to pay Greek pensions? Really, Mr. Wolfe? Really? 

Nigel Farage in the EU parliament said this recently.

He is mostly right. He is underplaying the troubles that are ahead for Greece-but what can’t continue won’t. Throwing good money after bad will make things worse. Yes most banks in Europe will go under, but they are bankrupt already. The sooner we understand that the present cannot continue, and act, the better off we all will be. Yes, Wolfe is right, even if he exaggerates some—the crisis is severe. The worst thing that can be done is continue on toward the cliff.