Grexit: Economic choice or political nightmare?


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The ongoing Greek saga is not simply about debt – it’s about the raison d’etre of the EU itself, says Joseph Mariathasan

I can remember asking a Greek American millionaire at the height of the euro-zone crisis what he thought about lending more to Greece. He thought briefly and then said that, for the European Union (EU), it was like it would be for him if his son were to ask him for a $100,000 loan. As he explained, he would have been willing to lend the money if his son were spending it on an MBA or starting a business. However, if his son had said he wanted it so he could spend the next three years boozing with his buddies, he would have been somewhat more reluctant!

That attitude has pervaded the discussions in Europe on what to do about Greece. There appears to be a generally held view that Greece falsified its statistics to join the euro, and that its politicians then used the access to cheap debt not to rebuild its infrastructure or invest in new industries but to bribe voters by spending lavishly on a bloated public sector and an unsustainable welfare system. But that dismissal of addressing Greece’s ongoing debt burden misses a far more fundamental issue that strikes at the heart of the raison d’etre of the EU itself.

The EU is a direct development of the European Coal and Steel Community (ECSC) established in 1951, just a few years after World War II, whose prime purpose was to prevent another European war. That rationale appears to have been forgotten in the debate over Greece. With hindsight, few would disagree with the notion that both Greece and the EU would have been better off now had Greece not joined the euro. But the past is the past, and the issue now is what to do next.

The heated discussions over whether Greece should be allowed to write off its debt and what precedent that would set for the rest of peripheral Europe ignore a far bigger danger than just economic disruption. The alternative for Greece of EU support is quite simple. It has a thousand years of cultural linkage with Russia (and the Ukraine). At a time when the EU is struggling to contain Russian president Vladimir Putin and faces the very real possibility of getting sucked into a proxy war with Russia over the Ukraine, the EU needs to beware of bearing Greeks as gifts! A Greek exit from the euro would inevitably lead to an exit of the EU itself by a desperate Greece, led by a far left leadership that has strong sympathies with Russia at a time when Russian nationalism itself has become buttressed by its commonality with Greece through Orthodox Christianity. Moscow was known as the ‘third Rome’ – the bastion of Orthodox Christianity – after the fall of Greek-speaking Constantinople in 1453. Greece moving into Russia’s sphere of influence supplied with appropriate economic support would be a rational response by both Greece and Russia in the wake of a chaotic Grexit.

The focus by Northern Europe, led by Germany, on the necessity of Greece’s sticking to austerity and debt repayment, come what may, is both misguided and hypocritical. To ‘extend and pretend’ that debt write-offs are not required and will not be tolerated is particularly bizarre given that West Germany had 50% of its debt written off in 1953. This was at the height of the Cold War, on the insistence of the US as it tried to develop a prosperous and stable Western Europe, strong enough to be able to stand up to the Soviet Union. As Europe faces a new existential crisis over Greece, that need to create a prosperous and stable EU strong enough to stand up to a post-Soviet Union Russia has become greater than ever. That idea should be the primary factor guiding EU decision-making over Greece and trumps concerns over the precedent it could set for Portugal, Italy and so on. Moreover, the years of austerity have led to real change in Greece. The corollary to the story of the Greek American millionaire is that, whilst he was unwilling to invest in Greece for many years, in 2014, he was more positive than he had ever been and was active in both private equity and real estate.

Joseph Mariathasan is a contributing editor at IPE

Readers' comments (5)

  • Is this a spoof or a serious article?

    - there is not a generally held belief that Greek stats were falsified, there is certainty.
    - well spent illegally obtained money is not an acceptable way of financing.
    - peace by EU is not forgotten. Several European countries have issued 70 years of peace commemorative coins.
    - there is no evidence that Greece and the EU would have been better off without each other. Just opinions. Serious historians have rejected alternative history as a method of analysis.
    - Greece does not have a thousand year link with Russia. Byzantium was no friend of the Kievan Rus (exception: the Varangian guard, which was not Russian). Small but significant example: a Byzantine silver bar would be accepted in Venice, but melted in Kiev, because they used a different weight standard. After the fall of Constantinople, Greece came under the influence of Bulgaria, not Russia. The Greek and Russian churches are competitors. The Ottoman empire was the arch-enemy of czarist Russia. After the second world war, Greece fought off USSR supported communists.
    - the EU is already in a proxy war over the Ukraine, witness mutual boycotts and EU financial advice and aid in place or offered to the Ukraine
    - there is a legal inevitability that getting out of the euro means getting out of the EU, not a political inevitability. The issue is premature, hypothetical and not enlightening.

    I could go on, but what for?

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  • 1. Cooking the books has not been restricted to Greece. – Other countries including some would argue France, have also done so.

    2. The article suggested that both the EU and Greece would have been better off if Greece had not joined the Euro. Is that in doubt? There was no suggestion that Greece should not have joined the EU.

    3. See quote “Tsar Nicholas I was the traditional champion of the Greek Orthodox, who insisted on Russia being confirmed by the Porte as the protector of the Holy Places and of all Orthodox Christians in the Ottoman Empire.” - See more at:

    4. The 1000 year link with Russia is cultural. – Christianity and indeed the Russian alphabet were introduced by Byzantine monks following on from Saints Cyril and Methodius.

    5. There was a civil war in Greece post the second world war, with Greek communists supported by Yugoslavia and Albania as well as Bulgaria. It was not a war between Greece and the USSR. The left still has a strong presence and support in Greece as the election of Syriza shows.

    6. The argument that is being made is that the EU is a political construct whose prime purpose is to ensure peace in Western Europe. Undertaking actions that threaten to drive Greece into close economic and possibly political ties with Russia is not in the EU’s interests in that respect. That should trump the economic issues.

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  • 1. Don't know about that but it doesn't look relevant. You strongly suggested that there was doubt about the fraud. There isn't.

    2. It is not in doubt. It is a wild and unproven statement. Do you know what Greece's policy would have been without the euro? What it would have done if weren't for the euro? If it would have been able to continue with tax fraud, corruption and crony economics forever? Do you know if Turkey would have been admitted to the EU if Greece had not had a voice? It is impossible to know what the world would have looked like if events had turned out differently. This is exactly why historians reject alternative history (what-if-Hitler-had-won-stories). The only instance I know of where it had a (limited) degree of credibility is a study done decades ago with the influence of barbed wire on US agriculture.

    3. What Nicholas said and what he was are different things. He claimed supremacy of the orthodox church, like most czars before and all czars after him, because he had a vested political interest - the ongoing enmity with the Ottoman empire. After the Raskol, the Russian and Greek rites had diverged. Today, the Patriarchs of the Russian and Greek churches do not claim each other's territory. In other words, the religious link you refer to ended in 1653.

    4. Have you taken the trouble to compare Russian and Greek script?

    5. As in the article, you confuse war and proxy war, as you mix up socialism, nationalism and communism. Tony Blair will get you for that.

    6. The argument is false. The core of the question is Greek unemployment. Greek growth is crucial for that. The Greek economy is growing, therefore, time is in favour of a solution. Ongoing reforms are the key for further growth. Greek debt is only a derived problem. It is quite easy to solve by rolling it over with a significantly longer maturity and QE will be of benefit to Greece, as will the above-mentioned growth. That will take concessions on reform, not repeal of reform. It will also take a stop to posturing and a start to realistic thinking. The main danger is not political, but stupidity of the parties concerned and the irrational and irresponsible hatred of anything concerning the EU and the euro in anglo-saxon countries, where financial market sentiment (as opposed to fact) is shaped.

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  • I agree there is both an economic and political dimension to the Greek crisis, and the political dimension should drive decisions. Maintaining peace and stability across Europe (and promoting Europe's strength in global economies and geo-politically) is a core raison d'être of the EU. As long as the EU politicians don't overstretch themselves and start making critical mistakes, that end up creating instability in the long run (a negative consequence of over-centralised economic/political power and planning).

    The tough political decision to be made now is whether the EU is stronger with Greece or without Greece. There are good arguments to be made on both sides, not least the issues with neighbouring countries and economic/political contagion. If you have a cancerous part of the body, it may sometimes be better to cut it off, rather than treat it. Equally, it doesn't help if the patient bleeds to death as a result. There is a danger that the EU will end up bleeding to death if QE fails to bring stability and the expected economic growth.

    @ Peter Kraneveld. Greek unemployment may well be the core of the problem for Greece and its politicians domestically. Mass unemployment leads to social unrest and social unrest leads to even more radical political leaders. But as you point out, economic growth in Greece needs to be accompanied by practical reforms, especially on the tax side, if Greece is to remain in the EU. Tax revenues from domestic tax-payers are collapsing even further (as they refuse to submit/pay their taxes), and this does not fly over very well in other European countries were tax payers are helping to fund domestic Greek spending and economic development. Emotionally, few outsiders like to see a country that takes with one-hand and then takes with the other, regardless of whether they support the EU or not.

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  • It is easy to agree with your last para, Simon, as we say the same thing. I agree with your first para also. I am taking issue with the history angle, but I am not saying there isn't a political issue. I think that the problem can be solved by economics, but you can only start the economic problem if the political problem is out of the way.

    Take the period of German hyperinflation as an example. The problem was political: The US, UK, France and Belgium insisted on enormous payment for war damage after 1918. As a consequence, the German economy was ruined. Hope was lost, not just for the younger generation, but for all. While France and Belgium kept insisting on the impossible, the US and the UK slowly understood that the social effect of hyperinflation and unemployment was getting dangerous. Once the four former allies agreed they had been asking to much, the solution was economic and easy: currency reform and debt forgiveness. We all know the solution came too late.

    Now, 1923 is not 2015 and the circumstances are not the same, but it would be foolish, especially if you are German, not to learn the lesson that it is possible to ask too much of a country in debt. There are several perfectly good ways too diminish the Greek debt burden. I described an economic solution for Greece in item 6 above. That leaves the question of what reforms you can ask of Greece. I would think that enforcing existing Greek law would be the minimum.

    However, either side can overplay its hand, especially during this childish posturing period. That would mean stupidity wins and all parties would lose.

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