A crisis is a noun referring to:
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The current situation within the eurozone is certainly an example of the first definition, but it remains to be seen whether or not it ultimately becomes an example of the second. The main problem with any kind of crisis is that it may involve the taking of a difficult and important decision. Commentators at all levels have once again been focused on the "Greek question": should Greece remain in the eurozone, or would it be better of by leaving the European single currency, and reinstating its own national currency (the "new drachma" perhaps?!)?
Consequently the Greek government has a difficult and important decision to make. Should Greece opt to remain in the euro it will be subject to all of the strictures which are required in order for the single European currency to remain a viable pan-European currency. This means what the press are fond of referring to as "austerity" measures. In fact, what is required is for governments such as those in Greece to reduce their spending and possibly increase taxation. This is largely because such governments have been profligate in the past and spent so heavily that it required them to borrow large quantities of debt which are not sustainable. Were Greece an individual or company it would long ago have had to declare bankruptcy.
What is almost amusing for us in the UK is that Greeks are being asked to raise the age of retirement to 65 from 55. Such a move is one of a number which would swiftly reduce government spending, but is being staunchly opposed by the Greek population. In the UK the age of retirement has been raised to 67, and is likely to go even higher over the next few decades. But there is a recognition here that the original age of retirement in the UK (60 for women, 65 for men) was based on a significantly reduced lifespan than is now the case. As people live longer it becomes less affordable for a Pay-As-You-Go (or intergenerational transfer) system to exist without significant change. For reasons best known to themselves, the Greeks are unwilling to recognise this fact.
But State pensions are not the only government expenditure which the Greeks need to reduce. And any reduction in State spending is bound to have detrimental effects on different sectors of the economy. In the case of Greece it can be argued that the "cuts" have been poorly handled, both in terms of the way they have been sold to the population, and also in terms of whom they hit the hardest; it seems to be the case in Greece that they have fallen with the biggest burden on those who can least afford to deal with their impact.
So what is to happen in Greece? The recent elections in Greece failed to produce a working government; none of the major parties seemed willing or able enough to compromise and form a coalition with any of the other parties. Greece no long has a working democratic government, but a caretaker government which is largely unable to make any major decisions. The next general election will be in June 2012, barely a month after those in May which proved indecisive. There remains a significantly high probability that these will yield similar results as in May, leaving the Greek decision on its position in the eurozone in limbo for the foreseeable future. At a time when many are expecting to take such an important decision for its own identity and economic and political future there is not a government in place to take such an important decision. And therein lies the real Greek tragedy.
It is my considered view that while there may be short-term gains from a Greek withdrawal from the euro, the long-term costs to Greece would be at least as significant as their currently unsustainable debt. It is all too easy seeing Greece go down the path of default previously experienced by countries such as Argentina, and the move towards a more extremist divisive politics which that often entails. With increasing trends towards coalition government in many countries there are important political lessons to be learned from the Greek experience. While I am not in favour of the straitjacket of balanced budget laws, governments need to find a way to borrow more sustainably in future. Reliance on the financial markets to provide discipline will not work if the markets themselves are not properly regulated, and lenders feel themselves to be well-insured on a "too big to fail" basis. The key problem is one of moral hazard, a form of market failure all too well-known to textbook writers but not to the regulators of financial markets and institutions.
It is therefore of crucial importance that as governments try to bring their finances under control, they do so in a manner which does not jeopardise the well-being of the populations they are meant to represent; even though it may involve costs, it is important those costs fall on those who can best bear them. However, without a well-thought plan to improve the regulation of the financial system on a global basis (rather than a knee-jerk reaction to the contemporary) we will see a similar situation arise again within the next 20-25 years, when the lessons of this crisis have become history. And we know what happens to those who forget the lessons of history ...
