Greece: The Eurozone’s Problem Child

by Jim Woods | August 27, 2012 12:53 pm

Have you ever known a family with a serious problem child? I suspect the answer is yes, as there are many, many families where one member has issues of sorts — most of the time of his or her own making — that give the family fits.

Whether it’s fiscal malfeasance, substance abuse issues, legal troubles or one of many other serious behavioral matters, the end result seems the same: The family ends up sacrificing and paying an undue amount of attention to the problem child in what is often a futile attempt to get he or she back on the right path.

This family analogy is one that comes to mind when thinking about Greece and the other members of the European Union.

Greece, no doubt, is the problem child, and Germany is the responsible head of the family who wants to do the right thing by its wayward member — but who keeps getting frustrated by excuse after excuse and plea after plea for just one more chance.

On Friday, we saw this eurozone problem-child scenario play out before our eyes, as Greek Prime Minister Antonis Samaras pleaded with German Chancellor Angela Merkel for just a little more time make the fiscal adjustments needed to get bailout funds from the strongest and most fiscally fit EU nation, Germany.

“We are asking for air to breathe as we plunge into the depths,” Samaras said during a joint news conference with Merkel in Berlin. The two leaders are meeting to hammer out an agreement on the implementation of the remaining Greek reforms before the next installment of €11.5 billion in aid is handed to Greece.

The way Germany sees it, eurozone taxpayers have already provided Greece with about €240 billion in rescue funds, which is largely backed by the Germans. Thus, they expect Greece to toe the line and do what it said it would do to get its fiscal house in order by privatizing many state-owned industries.

Here’s the money quote from Merkel that lets us in on that family frustration with the problem child:

“We have for more than two years guaranteed programs, support and a lot of money for Greece, and it always comes to that point where what we have expected has not happened, and from that has grown a lot of impatience.”

Indeed, a lot of impatience is the hallmark of responsible family members waiting for the troubled member to change its ways. Yet interestingly, the family almost always seems to give in to the sorrowful pleas of the problem child.

Why does this happen?

In the case of Greece and the eurozone, European officials now have decided that they need to do whatever it takes keep their family together and preserve the euro.

You see, by letting the fiscal problems in Greece (and also in Italy, Portugal and Spain) bubble up into a tempest in the fiscal teapot for the past several years, eurozone officials (including European Central Bank officials) have fostered the notion that the euro could be eliminated.

Well, eurozone officials don’t want that, as it would completely undo the fiscal threads that have been sewn together over the past decade. So, to stay together, the bloc must attack the idea that the euro will go away.

However, if the problem child that is Greece doesn’t fulfill its end of the fiscal bargain, and if it is forced out of the eurozone for failure to implement the reforms required to receive those bailout funds, then the eurozone will have a very tough time arguing that the family unit and its currency can remain intact.

The situation can be described as a domino theory, because if Greece craters and leaves the eurozone, then countries like Ireland, Portugal, Italy and Spain will have a tough time remaining in the family. Investors will undoubtedly read a Greek departure as a harbinger of things to come, and traders will attack the sovereign debt markets in these countries with a vengeance.

The eurozone doesn’t want this, and that means despite Greece’s problematic behavior, European officials will continue to extend targets, add more euros to their bailout funds and write the necessary checks.

In the end, it’s not out of compassion for Greece that the eurozone is going to capitulate to demands. Rather, it’s because it wants to do what it believes is in the best interest of the family.

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