The Greek Example

Editorial do WSJ

Seventeen-point-seven per cent. That was yesterday's yield on 10-year Greek bonds, up from 9.3% a year ago. Two-year bonds are closing in on the 30% mark, and the cost of insuring sovereign Greek debt stands at a stunning 18.2%. Prime Minister George Papandreou faces a crucial parliamentary vote to approve a fresh round of austerity measures—the condition for obtaining the next tranche of the EU and IMF bailout—and it would come as no surprise if his Socialist government fell. But that fall would be a footnote in the broader calamity that has overtaken Greece, which in turn could be a footnote to the calamity that awaits unreformed entitlement states everywhere, from Japan to California.

As these columns have argued from the first, this is not a liquidity crisis. The tab for last year's EU-IMF bailout came to €110 billion ($160 billion), and the number now being floated for an additional emergency loan is €45 billion. Yesterday, the European Central Bank's Nout Wellink called for doubling the size of the European bailout fund to €1.5 trillion, or $2.15 trillion, which did nothing to allay market fears but was a reminder of how little the previous bailouts have eased Europe's sundry sovereign-debt crises.

Nor is Greece (or Ireland or Portugal) a crisis of the single currency. Yesterday, French President Nicolas Sarkozy called on other European leaders to set aside differences over the terms of Greece's next bailout, warning that the euro's future depends on it. Mr. Sarkozy is especially keen to stave off German Chancellor Angela Merkel's demand that bondholders take a haircut in any new deal, and no wonder: French bank exposure to Greek debt runs north of some $57 billion, according to the latest figures from the Bank of International Settlements, including a whopping $30.8 billion for Credit Agricole alone.

But the notion that if Greece fails the euro must fail with it is false. The euro is a fiat currency, the value of which depends on the strength of its issuers' promises, along with the eurozone's prospects for economic growth. Yet the European Central Bank has been debasing its assets by accepting shaky collateral from Greek banks. Throwing good money after bad with another round of taxpayer-funded megabailouts won't improve that picture.

Nor, finally, are Athens's woes a crisis for the "European project," whatever one chooses to mean by that. Greece accounts for a mere 2.6% of eurozone GDP; the Irish and Portuguese economies are even smaller. We often hear it said that bankruptcy in Greece would set off "contagion" throughout the eurozone, an argument that treats the consequences of government profligacy as something other than a crisis of their own making. The main "contagion" that has spread so far is that every other overindebted European country wants the same easy bailout terms as Greece.

So what is the Greek crisis really about? For starters, it's a solvency crisis, meaning that bailouts can at best postpone, but not avert, the day of reckoning. Greece's debt-to-GDP ratio still tops 150%, and despite touting its efforts at austerity, government expenditures are up 3.6% year-on-year, to €21 billion. Its revenues for the first four months of 2011 were down 9.1% from the previous year.

Greece also suffers from a productivity crisis. The country's employment rate is under 60%, compared to a eurozone average of 64.2%. In 2009 Greeks produced $34.2 worth of goods and services per hour worked, according to OECD data—compared to $53.1 in Germany and $56.8 in the United States.

The productivity crisis is linked, in turn, to the huge proportion of Greeks employed by the state—fully a third of the workforce, by some estimates, and civil servants are unionized, often militant and politically influential. Combine that with the early retirement ages and the only recently amended fabulous pension schemes, and it all begins to have, for readers from New Jersey to Wisconsin, a familiar ring.

Despite all this, the European temptation is to kick the day of reckoning forward again, hoping that somehow it'll all be better in a year or two. The latest excuse for doing so is that a Greek default now could become another Lehman Brothers, triggering huge losses in Europe's banks, and flowing through to U.S. money market funds that hold European bank shares and debt. Voila, another crisis.

The answer to that danger is finally to face up to the problem of Europe's banks and clean them up. The politicians are afraid they'll lose power if they tell taxpayers the truth about this looming fiscal bill, but the taxpayers will be on the hook eventually on the current path too. Better to have private investors and shareholders share some of the discipline, not least as a warning that there is a punishment for reckless lending.

Then work with Ireland, Portugal and the other major debtors to reward better policies rather than let them slide down the road to Greece. Sooner or later, the bailouts have to end. There isn't enough money—not in Germany, not at the ECB, and not at the IMF—to finance the debt woes of every spendthrift nation.

Greece can't avoid a default, and its people can't avoid a painful reckoning. The main question is whether other democracies will learn from its painful lesson soon enough to avoid a similar fate.