The Intractable Greek Problem

Everybody is getting into the act, with headlines that joke about Greek gods and phrases like "Acropolis Now." OK, the parody of "Apocalypse Now" is not new, but the meaning is.

Paul Krugman, writing in the New York Times, bemoans the fact that the Greeks, by joining the eurozone, gave up the freedom to solve their crisis by devaluing the currency. He seemed to suggest that all they got in return was some prestige, which wasn't worth what they gave up.

But when they gave up the right to "fix" their economy with devaluation, they gave international investors the confidence to buy their government bonds at rates comparable to what would be charged Germany. The assumption was that the return on such bonds would be safe because the government could neither devalue nor default. Greeks saved a ton on interest.

However, the Greeks lied and cheated. They never qualified for membership without cooking the books and they have run deficits that they hid.

The technique which Krugman thinks so highly of is one that screws the international investors, who eventually get back their money in Greek currency but it's worth less than when they loaned it.

I don't see the exit plan. Loaning Greece money in euros, while the economy deflates, means that later they won't be able to repay the principal. Greece has a bloated civil service with cushy retirement plans. They need a more active private sector producing goods and services to be sold to foreigners, but this isn't likely to happen during the forthcoming austerity period. Whatever happens, it's likely to be ugly.