Time to rein in banks that act to conceal national debt and prop up lame economies that can barely stand
Greece has allowed its public sector to become bloated. More than 50 per cent of the economy is financed by government spending. The unions are very strong. They have threatened to strike if their budget allocations are cut. Greece has under-reported its public debt level, much to the fury of the European Union. There have been reports suggesting that Goldman Sachs might have played a role in helping Greece to conceal its public finances off the books so that Greece could prolong its pain undetected into the future. But as we all know, resolving debt issues by taking on more debt will never solve the problem.
Greece's budget deficit is about 12 per cent of the gross domestic product (GDP), while the EU mandates that this deficit cannot rise above 3 per cent of GDP. To bring down the deficit will cause much pain to the economy at a time when international creditors are worried about Greece's ability to repay its debt.
The EU is now seeing to it that Greece cuts its budget deficit from 12.7 per cent of GDP in 2009 to the 3-per cent limit demanded by the EU by 2012, with a 4 percentage point cut envisaged this year. Earlier this week, the Greek plan was approved by the 16 euro zone ministers, in exchange for a promise from Athens to adopt further belt-tightening in March if current deficit-busting measures prove to be insufficient.
But that may be too little, too late. Sweden, which does not take part in the euro zone, holds the view that the austerity programme adopted by the Greek government is not enough to restore confidence in the financial markets. This could further derail confidence in the euro zone at a time when a number of other members such as Portugal, Spain and Italy are also facing fiscal strains.
The financial difficulties faced by Athens have plunged the euro zone into its most serious crisis since it was created 11 years ago, as traders bet on a possible default by one of its members. If Greece does default, will the EU bail it out? Germany is now signalling that it will not allow Greece to fall. Last week, EU leaders issued a promise "to safeguard the financial stability" of the single currency, but only "if needed". But the group decided not to spell out details of any eventual bail-out plan for a country in crisis, which could involve bilateral loans or guarantees on its bonds from euro zone partners.
It is apparent that the learning curve for democracy does not move in a straight line. Democracy comes with responsibility and appropriate behaviour. What we see in Greece today is the result of a series of bad policy mistakes, too much power in the hands of the unions, too much government support in the economy, and the false hope of getting rich quick by joining the euro zone.
The day of reckoning will come sooner or later for all of these bad mistakes. Now Greece is being forced to tighten its belt, like a 70-kilo person being forced to reduce his weight to 60 kilos in just two weeks.
With many members of the EU also in dire fiscal straits, the question is whether the whole euro zone can survive. For there could be a contagious effect from the debt default of just one country.
