On Greece, Europe Bluffs Itself

How different is Greece really from France, Italy and Spain?

The Wall Street Journal

By HOLMAN W. JENKINS, JR.

April 21, 2015 7:31 p.m. ET

Greece’s new leader and his ministers are behaving like fools in their debt showdown with the European union. So claims much of the punditry and you won’t find an argument here. They’ve taunted Germany about war reparations, threatened to open their borders to jihadists trying to enter Europe and cozied up to Vladimir Putin.

They also haven’t presented a compelling alternative plan for Greece’s recovery because, as socialists, they must oppose many things that would do the Greek economy long-term good, such as privatization and deregulation. “There will not be the slightest privatization in the country, particularly of strategic sectors of the economy,” says a key member of the government.

Greece’s coalition is a collection of individual pols thrown together with little experience of government; there’s no reason to believe they are pursuing a coherent strategy and aren’t just trying to maximize their own career advantages. But they certainly have been acting as if they believe the European Union is bluffing and will ultimately write them a blank check to keep Greece in the eurozone.

Europe is not bluffing, the media tell us, because European leaders believe the eurozone would survive quite nicely a Greek departure. There would be no contagion. France and Spain might even welcome a Greek departure as a warning to their own emerging radical parties. A Greek meltdown might be a fillip to Europe’s long-stalled competitive reforms.

But what if Europe is wrong? Contagion can take many forms. The European Central Bank can offer itself as a perfect substitute for private investors refusing to buy the bonds of EU governments. But it can’t substitute for the failure of private investors to take risks and build businesses. It can’t substitute for private capital flight. It can’t substitute for Europe’s ambitious young people fleeing to London or New York or Silicon Valley.

ECB President Mario Draghi can print unlimited euros to keep governments afloat in the short term, but he can’t solve the long-term problem of slow growth and ever-larger piles of debt and ever-diminishing public confidence. If Greece leaves the euro and defaults on its debt, at least it answers the question: What happens to the debt? Greece might be seen not as a recalcitrant outlier but as the beginning of the end of the game of extend and pretend for all of Europe. What if markets see Greece as the model of how the euro ends? Not an attractive model: simply an unavoidable one.

After all, the big problem for Europe isn’t Greece or awkward debt negotiations. It’s a lack of growth and the uncertainty that every consumer, business and taxpayer must feel about how the Continent’s debt problems will be resolved given the lack of growth and the lack of revenue to make good on the debt. Alex Brazier, a senior Bank of England official, testified before a parliamentary committee that a Greek meltdown was not a direct risk to Britain’s economy, but its departure could “potentially be a trigger for a market reappraisal,” by which he presumably meant a reappraisal of whether Europe can ever find the political will to address its growth problems.

A certain kind of pro-business Europhile once hoped the euro would be a lever to overhaul the Continent’s welfare states. “Structural and competitive weaknesses will now be mercilessly exposed,” predicted a prominent German industrialist.

Alas, the euro turned into a conspiracy against reform, not an aid to reform. To ease the entry of Germany, Italy and France—and eventually Greece—Europe waived its own strict fiscal standards. To meet the imperative of bringing a skeptical public along, Europe’s banks were encouraged to treat Greek or Spanish or Italian debt as the equal of ultrasafe German debt for regulatory purposes. This artifice directly enabled the debt-fueled consumption binge of the 2000s that served as a substitute for reform.

As we wrote 12 years ago, “Countries that have earned their place in the self-help hall of fame—Britain in the late 1970s, New Zealand in the 1980s, America under Ronald Reagan—did so because voters demanded a bold change of course. The euro was never a shortcut to such a consensus.”

On the contrary, in sad fulfillment of prophecy, “reform” in the European context has come to mean surrender to the Germans and the opposite of what voters thought they were promised.

But the euro exists; it must now prove it can foster national economic makeovers or it can’t survive. Greece’s departure (increasingly likely) would solve nothing for Europe. Greece would be leaving because it failed to grasp the nettle of reform, which the rest of Europe mostly refuses to grasp. A real solution would offer Greece what it wants, debt relief, in return for what Greece needs—authentic, reasonable pro-market overhaul. Which is what Europe needs too.