Ilan Babaji's  Instablog

These last few weeks I found myself into one of the most burning issues of the European winter: Greece.

Greece’s budget deficit is remarkably high. It is estimated that they closed the 2009 with a deficit of 12,7 per cent of GDP and that their total fiscal deficit is around €254 billion (their product is nearly €240 billion).

According to the Maastricht Treaty, countries belonging to the European Union are allowed to a debt-to-GDP ratio no higher than a 60 per cent. In the case of Greece, this ratio is higher than 100 per cent, nearly 110 per cent.

These numbers started to make a lot of noise in such a sensitive market, always in search of new information that justifies its immense volatility.

Then the alarms began to ring. Greece’s stability was questioned as well as the European Union’s. It was stated that the Maastricht Treaty is clear enough regarding this point, and therefore the European Union will be very harsh on Greece for its irresponsible budgetary policy.

Besides, violation of the budget discipline agreements established by the bloc is a serious and grave matter, and Greece’s credibility consequently comes into play, as well as the Euro’s credibility and the continuity of the European Union.

For some analysts, Greece’s fiscal problems can be seen as deflationary risks for the rest of the world, and they can also delay the value recovery that financial assets are globally enjoying. But Greece is a relatively small country in terms of economy, with no key monopolies or industries. Then I consider that the possibility to see such risks crystallise is just remote.

There was even time for some Greek government employees to shout resentful phrases about their neighbors. There was also time for the Eurostat (Europe´s statistical office) to set up a research about the country after the news came into light about Greece not having declared that they utilised swaps to project their future payment obligations.

In the meantime, the Greek Credit Default Swaps jumped up more than significantly, indicating that the market demands an increasingly higher retribution in exchange for financing the Greek sovereign debt. It looks like the old empire will pay dearly for this.

Then the time came to consider the different options to sort out this situation. Each choice bears its own characteristics and potential consequences. There is the possibility to let the market decide.

That Greece finds its own way, without the need of the European Union’s intervention in its businesses. Greece will have to renegotiate its debt, probably offer more attractive rates to finance its deficit, and adopt a more serious long-term budgetary policy to be able to get its finances in order.

There is also the chance that the European Union decides to intervene, since Greece belongs to the bloc and thus, in theory, agrees to meet certain requirements to be part of it.

If the European Union decides to intervene, they can do it without setting any conditions, being flexible. The consequence of this policy would be that other countries facing delicate economic situations which are also part of the bloc (such as Spain, Portugal and Ireland) might find an incentive for disregarding their debts and budgets, following irresponsible policies in these matters, knowing that if they eventually reach a situation of stress they will be saved without facing major problems.

If the European Union decides to intervene with conditions, they will probably demand considerable budget cuts and changes in Greek budgetary policies.

And no matter how it is carried out, but with the European Union intervention there is also the possibility that many non-Greek citizens will be indignant at the idea that their tax payments are being be destined to finance irresponsible budgetary policies from the Greek government.

Finally, there is the chance that Greece withdraws from the European Union, either as punishment or as their own decision. The consequences of such measure would be devastating for the country, since it would mean to give up enjoying the fantastic economic and social advantages of belonging to the bloc.

Most probably the solution will be something more dynamic, a mixture of many possibilities; vital as life itself, as international economy and finances.

I consider that we should always start by a macroeconomic analysis before dealing with the microeconomic one, that we should take a strategic look at a global level before analysing the particular.

Greece represents around 2,5 per cent of the European Union’s total product. It is therefore a country which does not contribute a significant economic volume to the bloc. Then it cannot lead the bloc to a scenario of political risks of continuity of its agreements or of its currency.

Another key issue is that this country’s deficit has been higher than its output even before becoming a member of the European Union. This clearly shows that the subject we are discussing is no novelty whatsoever for the European policy makers. They all knew what Greece was like, and they still invited the country to join them because they saw the economic, political, social and cultural advantages of its participation.

European Union embodies a highly significant set of values at a global level, which will prevail over a quarrel of this nature. This Union represents a step towards evolution of the organisational systems at all levels. In its current development I see something which I consider particularly attractive: countries that accept to give up part of their sovereignty in exchange for being part of a common good, of a superior goal for their peoples.

The European Union represents a giant footprint in history, when many countries which were rivals in the past realized that cooperation was, undoubtedly, more beneficial than fighting.

This is nothing but a matter of public finances which can be solved, and I am sure it will be done easily. It is worth though, understanding what it is about, which are its causes and possible consequences.

But there is no point in getting panic-stricken. All this is part of the economy’s game and international finances. Greece will survive and its public finances too.

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by Leandro Taub for Alrroya.com


Disclosure: No Positions