Greek Tragedy Haunts Global Markets, Policies

By Bruce Stokes
YaleGlobal

WASHINGTON ― To paraphrase the noted economist Woody Allen, Europe is at a crossroads as it confronts the Greek economic crisis. One path leads to utter hopelessness and despair, the other to total extinction. One can only hope that the Europeans have the wisdom to choose correctly.

Since American financial institutions aided and abetted Greek budgetary profligacy and because the choices Europeans make and will make in the months ahead will directly affect American economic and foreign policy interests, Washington can ill afford to stand on the sidelines.

The Greek crisis is a textbook example of the interconnectedness of the global economy and the foreign policy environment.

For most of the last decade, the Greek economy grew faster than others in the euro area. Yet, the country's balance sheets worsened. By 2009 the annual government deficit equaled 13 percent of the economy and public debt was 107 percent of GDP.

So, when the global recession hit, and the Greek economy contracted by 2 percent in 2009, international bond markets panicked, fearing that Athens was going to have trouble meeting its obligations. By mid-February the Greek government was paying three percentage points more to borrow money than the interest rate charged Germany, worsening the mismatch between Greek revenues and expenditures.

Wall Street bears some of the blame for this mess. Goldman Sachs and possibly other American financial institutions reportedly helped Athens understate its true indebtedness through the creation of innovative financial instruments.

"We are looking into a number of questions relating to Goldman Sachs and other companies and their arrangements with Greece," said U.S. Federal Reserve chairman Ben Bernanke in recent Congressional testimony.

But Washington has more self-interested concerns. Europe is America's largest export market. But, in part thanks to the Greek crisis, the euro has fallen in value by 8 percent against the dollar since November, 2009, making American products more expensive for Europeans. An extended period of weakness for the euro would undermine the Obama administration's ambitions to double U.S. exports.

But it is the foreign policy implications of the Greek crisis that are keeping people awake at night in the White House.

Washington needs Europe's help in Afghanistan and in dealing with Iran, China and Russia. But the growing preoccupation of governments in Berlin, London and Paris with staving off a financial meltdown and their populations' isolationist response to the crisis leave Europe with little time, political capital or cash to be spent on America's foreign policy priorities.

The most immediate cost may be the lost opportunity to further defuse Greek-Turkish tensions, long an American goal for the region. The new Greek Prime Minister George Papandreou is the most pro-Western leader Greece has elected in decades. And he had hoped to improve relations with Turkey. But now his government will, at best, be consumed with the crisis and, at worst, could fall thanks to populist frustration with the belt-tightening that lies ahead.

Europe's spreading financial troubles also leave it dangerously vulnerable to Russian meddling. Former U.S. Treasury secretary Henry Paulson alleged in his recent book ``On the Brink'' that Moscow dumped its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a costly Washington bailout of those mortgage-finance firms. A similar attack on the European bond market, to demonstrate Russian influence in Europe's moment of vulnerability, can not be ruled out.

A united Europe has also long been an American foreign policy priority. So any threat to the future of the euro and the cohesiveness of the European Union sets off alarm bells in Washington.

The first casualty of the Greek crisis may be European Union enlargement, which America has backed as a means of spurring economic growth and democracy in Central and Eastern Europe. The Greek crisis is likely to raise concerns among existing EU members that bringing more countries into the EU will imperil the core economies.

Washington also has to worry that the intra-European antipathy that the Greek crisis may engender will make it even harder to get unified European positions on issues of interest to the United States, such as climate change and global financial regulation.

Thus, how the Europeans deal with the Greek crisis is an American foreign policy problem. So it is time for president Obama to rethink his decision not to attend a proposed U.S.-EU summit in May in Spain. Obama needs to go to show solidarity with the Europeans in their hour of need, to encourage them to get their act together and to articulate forcefully US interests in their crisis management.

Foremost among these is the avoidance of a double dip recession in Europe. Obama should make the case that now is the time for the European Central Bank to be cutting interest rates not raising them. He might also enlist the help of his European counterparts in pressuring Beijing to allow an appreciation of the Chinese renminbi, a long-sought American goal that would also boost European exports, aiding the beleaguered European economy.

Obama should also have a heart-to-heart talk with German Chancellor Angela Merkel. The external deficits threatening the futures of Greece and possibly Portugal, Spain and Italy, other deeply indebted European countries, are, to a certain extent, the mirror images of the German external surplus.

One of the best things the Germans could do for their fellow Europeans is to consume more. This would admittedly be a hard sell to the parsimonious Germans. But it is the same pitch the Americans are making to the Chinese. In times of trouble, surplus countries have responsibilities, just as deficit nations do.

Finally, Obama should articulate Washington's interest in having the International Monetary Fund, rather than the European Union or Germany, run an eventual Greek bailout. It is understandable that Europeans want to clean up their own mess. But self-reliance is only admirable if it has a reasonable prospect of working. The European Commission lacks experience overseeing the kind of structural reforms needed in Greece and other hard-pressed European debtor nations. And Berlin, which would have to be the largest paymaster for any bailout, faces populist opposition to writing checks to Athens and others that could easily undermine the Merkel government at a time when Washington needs Merkel on other issues.

The IMF is already helping Hungary, Latvia and Romania restructure their economies. Moreover, the IMF can tap its own reserves to help pay for the effort, which, from a U.S. geo-political view, would be far preferable to Greece borrowing from Russia or China. And the IMF can be a useful scapegoat for the populist anger that necessary cutbacks in public spending will create. For the sake America's interest in future European solidarity, it would be better if the inevitable protests in Athens vilify the IMF rather than Brussels and Berlin.

The Greek crisis is a cautionary tale. In a global economy, financial earthquakes in one nation have the potential to destabilize international markets and wreck havoc with the foreign policy objectives of even super powers like the United States.

In the future, the domestic budgetary problems of even small countries can expect to be subject to greater international scrutiny. And the budgetary problems of big economies, such as America, can no longer be considered to be purely a domestic, sovereign concern.

Bruce Stokes is the international columnist for the National Journal. You can also see this article at http://yaleglobal.yale.edu.

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