Athens Is Burning and Merkel Holds the Match
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- Athens is besieged by riots because ordinary Greeks understand what their leaders won't admit. The reforms imposed by Angela Merkel and Greek creditors will delay but not avoid a sovereign default. Those won't solve the nation's chronic economic problems and ultimately will cause the ruin of Europe's most ancient civilization.
At issue are the conditions imposed by Germany and other rich European nations, the International Monetary Fund and European Central Bank, and private creditors in exchange for an aid package and deal to cut Greek government debt in half and avert a sovereign default in March. These draconian budget cuts, including some 150,000 government jobs, a 22% cut in the private sector minimum wage, and other reforms are intended to make the Greek economy more competitive, attractive to investment and ultimately capable of repaying its remaining debt.
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In addition to assent from the sitting parliament, Germany and others are demanding that opposition political leaders pledge not to seek to renegotiate these terms if Greeks vote for a change in government. Essentially, led by German Chancellor Angela Merkel, Greece's creditors are demanding that Greece become a German protectorate, deprived of democracy, or it will be let to default, treated as a pariah by the European Union and impoverished.
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That might be acceptable, if the reforms would fix the Greek economy and permit sustained growth, but Greeks rioting in Athens and elsewhere have figured out what their leaders won't admit -- the package can't work.
Like other southern eurozone nations, the euro is overvalued for Greece's economy -- it makes Greek exports too expensive and imports from places like Germany too cheap. Consequently, all the Mediterranean nations have been running large and growing trade deficits with Germany and other northern economies and borrowing to pay their bills -- that's the origin of all that sovereign debt in Portugal, Italy, Greece, and Spain and why each of them is in need of some kind of bailout.
Higher taxes, spending and wage cuts and labor market reforms will only permit these nations to attract investment, grow and earn euro to pay what they still owe, if those policies cause their economies to accomplish sustained trade surpluses with Germany and other northern European economies. Simply, that is not going to happen.
In addition to these Mediterranean states, France and other nations further north are also cutting government spending. This is thrusting Europe into recession in 2012 and will compel rather slow growth or continued recession for the next several years. In that environment, hardly any new industrial facilities will be built in Greece or anyplace else in Europe.
Germany's whole economic policy is premised on a euro that is overvalued for the Mediterranean states but undervalued for Germany, Holland and a few others -- those run persistent trade surpluses with Mediterranean nations and the U.S. During a period of slow European growth, it is doubtful that Germany would permit its large industrial enterprises to move substantial employment to Greece and other southern locations.
More simply, Greek economic reforms cannot succeed without more exports and that would require Germany to give up jobs and industry. Phrased in those terms, it is doubtful Angela Merkel could make a decent case for the regime she so stridently is imposing on her Hellenic neighbors.
The stakes are enormous -- unemployment could easily rocket above 30% in Greece for years. With the government having with no real means to ease the pain, revolutionary conditions will prevail. Even now Greece is little more than a barn full of straw in the middle of a summer drought.
Yet, in a fit of Teutonic arrogance, Merkel is demanding, even if the aid package and reforms fail, no negotiations with a future Greek government -- no turning back even if Greece risks sinking into state entropy and chaos.
In the street of Athens and other cities, citizens are rioting because they understand the folly and injustice of this deal.
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Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.
