Europe's Greek tragedy

A homeless man sleeps outside the Athens main train station on Wednesday. Thousands of Greeks took to the streets again on Wednesday as a general strike shut down the country against a new raft of government austerity measures designed to forestall a costly debt overhaul.Photo: AFP

Valentine's Day is supposed to be a celebration of love between partners, but that was in short supply when ministers from Europe's single currency zone met on the fifth floor of the Justus Lipsius building in Brussels on February 14.
After a brief lull in their debt crisis at the start of 2011, tensions in the 17-nation euro area had returned and financial markets were piling new pressure on the bloc's weakest members.
Ten days earlier, German Chancellor Angela Merkel and French President Nicolas Sarkozy had sparked an angry EU backlash by unveiling a plan to impose debt limits and harmonize wage policies across the vast economic area of 330 million people.
Deep divisions over the shape of a new anti-crisis package that European leaders had promised to unveil by late March were opening up.
Also hanging over the meeting was a new fear so troubling the finance ministers had taken special care not to discuss it in public -- the rising risk that Greece would have to restructure its 327 billion euro ($470 billion) debt mountain.
The week before, inspectors from the European Union and International Monetary Fund (IMF) had approved 15 billion euros in aid to Athens, the latest tranche of a 110 billion euro bailout package sealed in May 2010.
But Poul Thomsen, the IMF envoy monitoring Greece's economic progress, had coupled that decision with an unusually stark warning to the government of Prime Minister George Papandreou which instantly rang alarm bells for investors.
Without a "significant, broad-based acceleration of reforms", he said, Greece's rescue program was doomed.
Even with the curtains drawn and their words safely muffled by heavy wood paneling in the large Brussels conference room named after Finland's first permanent EU representative Antti Satuli, the ministers were uneasy.
Jean-Claude Trichet, the grey-haired 68-year old president of the European Central Bank, who had travelled from Frankfurt for the meeting, accused the ministers of "shooting at your feet" for broaching the idea of buying up Greek debt and then retiring it to reduce the country's burden.
In the same building nine months before, Trichet had come under intense pressure to allow the ECB to acquire Greek debt on the open market, later pushing this controversial decision through over the objections of German Bundesbank chief Axel Weber. With his term at the helm of the ECB nearing an end, he was desperate to get tens of billions of euros in toxic Greek paper off his books. But governments were not cooperating.
As the barbs flew, Jean-Claude Juncker of Luxembourg, who was chairing the meeting and sat at the opposite end of the room from Trichet in a black suit and lavender tie, reminded participants that it was important to present a positive, united message on Greece's woes to the public.
Staying positive was not easy. To the left of Trichet, wearing a black dress and white Chanel jacket, Christine Lagarde of France grew impatient. Discussion of a Greek default, the former synchronized swimming champion said, should be avoided at all costs as it could unleash consequences beyond the control of the bloc and its members.
"You can't stroke an elephant just a little bit," Lagarde warned, according to confidential minutes of the meeting seen by Reuters.
Elephant indeed. Despite the best efforts of policy-makers to suppress discussion of Athens' problems, the expectation that Greece will become the first western European country to restructure its debts since post-war Germany in 1948 has taken on a sense of the inevitable in the past two months.
Last week a small group of euro zone finance ministers met in Luxembourg and admitted what had been clear to others for some time -- that last year's bailout of Greece had failed to restore confidence in the country's finances and new steps were urgently needed to alleviate its debt burden.
Sources tell Reuters they are now considering throwing more money at Greece and easing the terms of existing loans, possibly in combination with the "voluntary" involvement of Greece's private creditors.
But this strategy will only delay the real pain until a later date.
Most economists now believe that without an aggressive restructuring which forces private creditors to take losses of 50 percent or more on their Greek holdings, the country will not emerge from its downward spiral.
The only obvious alternative -- keeping Greece on EU life support for many years -- seems a political non-starter given the growing opposition to further aid in northern European countries such as Germany, Finland and the Netherlands.
Greece's debt crisis is the biggest challenge the bloc's policy-makers have faced since the launch of their bold currency experiment 12 years ago. European monetary union was always more about politics than it was economics. That's been part of the problem. Now those two factors -- economics and politics -- are on a collision course that could ultimately fracture the bloc, with Greece and other vulnerable countries like Ireland and Portugal forced to consider exiting the euro zone.
That would be a devastating setback for Europe, whose common currency is the culmination of half a century of closer integration.
"Greece's debt is at levels where it is very rare for a country to make it without a restructuring," Kenneth Rogoff, an economics professor at Harvard University and co-author of "This Time is Different", a best-selling 2009 book on debt crises, told Reuters.
"It is a manageable problem but it needs to be managed. You can't just put your head in the sand and hope it goes away."
THE BENEFIT OF HINDSIGHT
It wasn't supposed to come to this. Last year, when the EU and IMF teamed up to rescue Greece, they mapped out what they believed was a realistic plan for overhauling its ailing economy through a combination of spending cuts, tax hikes and deep structural reforms.
Coupled with an aggressive drive to root out corruption and tax evasion, this austerity was the shock therapy Greece needed to regain competitiveness, reduce its debt and win over investors again, the argument went.