The Greek Tragedy Has a Moral

05/23/2011 1:30 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The US would be unwise to duplicate Europe’s death by a thousand cuts, writes Senior Editor Igor Greenwald.

The emperor is wearing no clothes, and I’m not referring to the recently retired head of the International Monetary Fund. No, this is about a different French economist.

European Central Bank President Jean-Claude Trichet is looking distinctly chilly as he prepares to take a bath on dodgy Greek bonds, though perhaps those are goose bumps of embarrassment.

It was only a little over a year ago that Trichet was vowing not to buy sovereign bonds come what may. And then May came, the markets tanked, and soon enough the ECB was buying all sorts of sovereign bonds, accepting any old piece of paper as collateral, and swearing up and down that conference table than no Eurozone member would ever default.

So here we are, an eventful 12 months later, and Greece is on the brink—just two months of cash in the bank, and deemed by the financial markets a sure goner. Ireland and Portugal have gone down the same road, their banks propped up by loans from the ECB in exchange for austerity that hasn’t solved a thing.

And now Spain is edging toward the same cliff, its budget-cutting sparking massive protests and election losses—even as demand for Spanish bonds dries up again, threatening an unaffordable spike in interest rates.

And so Trichet’s policy of shoveling temporary funds at Europe’s debt-ridden fringe to make sure it keeps paying interest to the French and German banks—all the while squeezing the countries’ real economies—stands exposed as an abject failure, and a lesson to US politicians wrestling with a similar combination of mushrooming debt and tenuous economic growth.

The takeaway: Austerity that doesn’t reduce debt payments and that doesn’t chart a realistic path back to growth is doomed to failure. Because growth is what ultimately supports a country’s tax revenue, and therefore, its ability to pay its debts.

In recent months, Europe’s failure to devise a realistic restructuring has become obvious, not just to the voters in heavily indebted lands, but equally to the taxpayers in the more prosperous regions. Even the banks Trichet has bent over backwards to protect finally see the writing on the wall, which is why some are now racing to raise additional capital.

As more and more key European politicians accept the prospect of a Greek default in some form, Trichet is down to storming out of meetings as a means of keeping the inevitable at bay.

What Trichet and his German allies have missed is that debt crises, at their root, are caused by insufficient growth.

Italy is more akin to Portugal than Spain—it didn’t have a real-estate bubble. But that hasn’t stopped Standard & Poor’s from threatening to cut the country’s credit rating, adding to the sense of global doom. And the main reason S&P is no longer quite so confident in Italy is that there’s been little growth of late—while the debt, of course, continues to mount.

There’s no easy way out, only the hard necessities of restructuring debt obligations, raising fresh bank capital, and moving on with structural reforms capable of stoking domestic demand.

No country, not even Germany, can survive on exports alone. Those booming German exports have relied on Asian growth that won’t sustain the recent breakneck pace for long.

The good news (and also the bad news) for Europe is that the hour of reckoning, so expensively postponed a year ago, seems once again to be at hand.

It’s good news because debt defaults can kickstart growth, as money that used to be spent on interest gets invested instead, and as new (and cheaper) currencies make workers more competitive with the prevailing global rate.

That’s the blueprint for all developed countries coping with low-wage Asian competition. It does no good to pretend that austerity is any sort of long-term answer, or to demand that currency rates hold where they were 200 million migrants into Chinese cities ago.

We’re confronted today once again by the spectacle of money pouring into US Treasuries at a time of stress, despite the fact that the federal budget deficit as a percentage of the GDP is way above what chastened Greeks have been running recently.

Many pundits are warning that if we don’t shape up we’ll be next. That may well be true. But we could get to the same lousy place faster still by adopting the Trichet workout regimen.

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