June 4, 2012
With Europe’s economic woes dominating the headlines once more, it’s hard not to think of Yogi Berra’s dictum “It’s déjà vu all over again.” As usual, the turmoil centers on Greece, which is in its fifth year of recession and struggling beneath a colossal debt load. This year, in exchange for drastic austerity measures, Greece’s government agreed to an aid package (its second) with the European Union and the International Monetary Fund, totalling $174 billion. But three weeks ago furious Greek voters tossed the ruling parties out of office; attempts to form a coalition government failed, and new elections are scheduled for next month. Now Greek politicians are talking tough about renegotiating, but the E.U., led by Germany, which is the largest contributor to the bailout, says that there will be no more money for Greece if it doesn’t live up to its promises. So policymakers are seriously discussing a so-called Grexit—in which Greece would default on its debts and abandon the euro.
This isn’t an outcome that anyone wants. Even though a devalued currency would make Greece’s exports cheaper and attract tourists, it would do so at a terrible price, destroying huge amounts of wealth and seriously harming the country’s G.D.P. It would be costly for the rest of Europe, too. Greece owes almost half a trillion euros, and containing the damage would likely require the recapitalization of banks, continent-wide deposit insurance (to prevent bank runs), and more aid to Portugal, Spain, and Italy, which seem to be the next countries in line to default. That’s a very high price to pay for getting rid of Greece, and much more expensive than letting it stay.
Rationally, then, this standoff should end with a compromise—relaxing some austerity measures, and giving Greece a little more aid and time to reform. And we may still end up there. But the catch is that Europe isn’t arguing just about what the most sensible economic policy is. It’s arguing about what is fair. German voters and politicians think it’s unfair to ask Germany to continue to foot the bill for countries that lived beyond their means and piled up huge debts they can’t repay. They think it’s unfair to expect Germany to make an open-ended commitment to support these countries in the absence of meaningful reform. But Greek voters are equally certain that it’s unfair for them to suffer years of slim government budgets and high unemployment in order to repay foreign banks and richer northern neighbors, which have reaped outsized benefits from closer European integration. The grievances aren’t unreasonable, on either side, but the focus on fairness, by making it harder to reach any kind of agreement at all, could prove disastrous.