The recovery of Greece from the financial crisis is being hampered by international market speculators and the euro-zone finance ministers, who have changed the terms of the Greek bailout. A contagion of crisis-induced sell-offs of Greek government bonds by speculators resulted from the recent decision of the euro-zone finance ministers to delay the payment of $11 billion in bailout funds to Greece until October 2011. The decision was taken two days after assurances were given by German Chancellor Angela Merkel and French President Nicolas Sarkozy that they do not intend to let the Greek crisis spiral out of control.    

The bailout of Greece by the European Union and the International Monetary Fund consists of a first loan of $155 billion in 2010 and a second loan of $110 billion this year, with private banks and investors making loans of $71 billion to the rescue package. The debt of Greece is estimated at $490 billion. Greece has repaid its past loans with interest to the IMF. Greece can repay this loan over the medium term with acceptable interest rates, but not at a short term “usury” rates of 25 percent-plus annually.

Ann Pettifor makes a convincing argument in the Huffington Post on Sept. 23 that Greece’s debt is a symptom of the crisis, not the cause. More austerity and higher declining GDP rates will not save Greece’s economy, nor the euro zone.  She recommends fixing the broken banking system in the EU.

During the past 20 months, the Greek government has imposed austerity measures by cutting the size of the bureaucracy, salaries and pensions while raising taxes and retirement ages. However, the euro-zone finance ministers decided that the implementation of the austerity measures was slow on the privatization of the government companies and the collection of new taxes. In the new emergency measures, the collection of taxes were added to the monthly payment of electric bills, and the selling of government companies was expedited.  According to Minister of Finance Evangelos Venizelos, the emergency implementation measures and the austerity provisions in the 2012 budget would record a government surplus of €2 billion in 2012. 

The cases of Greece, Portugal and Ireland go beyond the financial crises of these countries and challenge the vision of the founder of European integration, Robert Schuman, for a United States of Europe. The EU was established in 1993 with six member states but its origin can be traced to the European Coal and Steel Community in 1957.  In the intervening years the EU has succeeded in making trade, investment and the movement of people free among its member states and has achieved a higher standard of living for its people with a greater degree of political stability and cooperation. The main achievement of the EU has been the establishment of the euro zone in 1999 and the use of the euro as the common currency.

The decision-making process in the euro zone, with 17 member states, is understandably slow, and measures to expedite the implementation of decisions must be introduced in order to limit market frustrations and opportunities for market speculators. The euro zone needs to speak with a unified voice rather than dissenting voices. The mixed signals from the euro zone do not encourage China to assist the euro zone with trade and investment.  However, China has already decided to purchase European bonds because of the high risks if the instability in the world financial markets continues.

Another warning for the EU and the U.S. is the case of the prolonged stagflation in Japan, which has produced negative economic growth and lower employment rates. Stagflation in Japan is due to the lack of support of the Japanese voters to the proposed government bailout of Japanese banks and of the measures to stimulate the economy because of government deficits. It is possible that the U.S. economy will experience stagflation if the American voters reject proposed employment and other economic measures to stimulate the American economy.  A similar development would occur in Europe if the EU and the IMF delay their bailout measures in support of member states. 

Time is growing short for the euro-zone politicians and the voters to coordinate their actions for the common good of the European Union. The Greek government is doing the best it can in extremely difficult circumstances and under intense pressure from the public on one side and the euro-zone finance ministers on the other. The Greek finance minister has complained that the Greek bailout has become a political football in the euro zone. 

In today’s competitive and interdependent world, the European Union must find solutions to the financial crises of its member states for a more stable and prosperous world.  The cost of saving Greece is high, but the risk of the fallout on the world financial markets is far higher. 

Dr. C. G. Alexandrides is professor emeritus of management at Georgia State University and may be reached by email at calexandrides@gsu.edu.