Greece and the Global Sell-Off
One reason growth hopes are unraveling is Europe’s failure to get serious about its bigger troubles.
By Holman W. Jenkins, Jr.
Aug. 21, 2015 6:47 p.m. ET
A Greek national flag flies outside the Athens Stock Exchange SA on Aug. 21. Photo: Bloomberg News Why are world stock markets suddenly having hysterical fits? The Greek crisis is over, sort of, and the Greeks won, sort of. That’s the signal from decision makers in Europe, aka Angela Merkel and Mario Draghi. Europe has given up the bluff and is unwilling to let Greece default out of the eurozone. Isn’t that what the markets wanted?
But this leaves only European taxpayers to pick up the tab for Greece’s debt, though Ms. Merkel and colleagues will conceal this fact from taxpayers for as long as possible. Radical reform of the Greek economy—the kind that countries undertake when their backs are to the wall—won’t be coming either. China is just part of this week’s global meltdown. What also is sinking in is Europe’s use of Greece to avoid recognizing its own deeper troubles.
Greece, which is about to become a permanently depressed ward of the European Union, accounts for less than 1.3% of European Union GDP; half of European GDP already consists of government spending, of which about $456 billion annually is borrowed. In this great whoosh of borrowing and spending by Europe’s governments, money to keep Greece permanently stumbling along will be a rounding error.
Greece’s debt, so giant on paper, has already been partially alchemized into non-debt: Most of the debt has migrated from private holders to government agencies. The interest rate has been cut, the maturities extended; a “grace period” means the actual payments required of the Greek government are smallish.
But the larger point is that the size of Greece’s debt doesn’t matter (as Italy, France, etc. have shown) now that Greece is inside the magic circle. Greece, albeit indirectly, is being cut in on the same deal that Mr. Draghi at the European Central Bank began offering three years ago to “core” European governments—his “whatever it takes” promise to make sure they would always find a buyer for their bonds.
Alas, this solution means that any hope of a Greek-spawned cathartic moment that would show Europe grappling with long-term challenges also has been anesthetized.
The larger eurozone crisis clearly now will continue unaddressed. Other more important countries still labor under unpayable debts; are still unwilling to reform their welfare states; still inflict confidence-killing stagnation on their people that would seem to leave no light at the distant end of the tunnel except inflation or default. Abby Joseph Cohen of Goldman Sachs this week turned on its head one of Europe’s main excuses: Its birth dearth, she said, is not a cause of stagnation, but an effect: Why have kids when a quarter of each generation is sacrificed to joblessness to protect vested interests?
Though some carry on hoping, “whatever it takes” not only relieves pressure for reform. It relieves pressure for a fast march to a centralized United States of Europe that supposedly would solve all problems. But it wouldn’t: The problem of the debt would still be there, posing the same threat to togetherness it does now.
Meanwhile, it takes only one confused radical party coming to power in Italy, Spain or France—threatening to renege on its debt—to blow up the extend-and-pretend future that Europe is shaping up for itself.
Who would have thought that hope in our world would come from more and more people wishing to be Japanese—hoping their societies will settle for a permanent, gentle stagnation financed by endless government borrowing without leading to runaway interest rates and inflation?
The blessing—yes, blessing—of financial repression and incipient deflation is what Europe is reduced to praying for, a world in which economies can safely not grow and yet continue to roll over massive debts at very low interest rates.
Unfortunately just as the largely unexpected and unexplained coincidence of very large debts, very slow growth, very low interest rates and very low inflation came out of nowhere, the next change is likely to catch us by surprise too.
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