Greece's dilemma in fiscal cuts and EU membership
- By Jiang Shixue
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E-mail China.org.cn, May 16, 2012
It is too simplistic to say that fiscal cuts are totally harmful for countries in crisis. Actually there are two kinds of austerity. One is to reduce public investment in productive activities, and this cut will jeopardize the economy. The other is to cut unnecessary, extravagant or wasteful government spending, and this measure is helpful for a fiscal balance. In other words, some of the fiscal cuts are necessary whereas others are detrimental.
The message from the troika is simple. If Greece cannot meet the agreed target of fiscal cuts, there would be no more bailout funds. Hopefully, the Greece politicians will think hard before they say "yes" or "no".
After the May 6 election in Greece, people around the world are asking whether the cradle of the Western civilization should also be its grave. The most unthinkable outcome would be an end of its membership in the euro zone.
There are two ways of ending Greece's membership in the euro zone: being forced out by EU leadership or leaving voluntarily. It seems that neither scenario is likely to happen. For the time being, there are no rules or treaties in the EU for the termination of a country's membership in the euro bloc. Moreover, such an action carries the danger of damaging the unity in the euro zone. As German leader Merkel says, in the face of a debt crisis today, it is imperative to have more Europe, not less.
Some people suggest that Greece should leave the Euro zone voluntarily so that it can regain sole control over its monetary policy to tide over the present crisis. Some economists even cite the example of Argentina which, in the face of a severe financial crisis in 2001 and 2002, dropped off the currency board, a rigid foreign exchange rate system, and walked out of the crisis quickly by devaluing the peso to stimulate exports.
For Greece, following Argentina's example might be a feasible option, as the Southern European nation does not have much to sell to the global market even if it could say "good-bye" to the EU.
Furthermore, after leaving the euro zone, Greece would definitely witness a financial catastrophe as capital would rush out of the country and banks would go bankrupt. No less significant is the cost of changing accounting system and price tags in business establishments across the whole nation.
The contagion effect of Greece's end in the euro membership would also be enormous. One of the biggest fears is that other nations in debt crises might follow Greece's footstep to print their own currency. If that should happen, the EU would be in great danger of breaking up. That is the scenario Germany and other nations in the euro zone would try very hard to avoid.
As the Chinese proverb goes, the roof leaks when it rains all night, or misfortunes never come single. Greece is faced with a twin-crisis because the winners in the Greek parliamentary election cannot agree on forming a coalition government. Now Greece sets for new elections as the coalition talks fell. Whatever the result, fear of disorderly default is on the rise, and that is certainly a heavy blow to market confidence.
The author is a columnist with China.org.cn. For more information please visit http://www.keyanhelp.cn/opinion/jiangshixue.htm
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