Watching a modern Greek tragedy

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We all recall from our high school literature classes that the Greeks are especially adept at the art of the tragedy. We can see that expertise playing out in Athens today. The government of Prime Minister George Papandreou is fighting for its life as the nation teeters on the edge of default and descends into violent street protests. He sacked his finance minister on Friday in an attempt to throw the mob a target of their ire and save his own neck. The leaders of Europe are embroiled in embittered disputes over how to resolve Greece’s debt problem before it drags its neighbors and perhaps even the euro into the toilet. (Some progress may have been made on Friday when German Chancellor Angela Merkel signaled her willingness to compromise on the main point holding up a new bailout — whether private creditors of Athens should face a debt restructuring.) The Greeks’ plight is a tragedy on so many levels, it is hard to know where to begin.

Let’s start, though, with how Greece got into this mess – a drama of the multiple failings of European leadership. Greece probably should never have been allowed to join the euro zone in the first place due to its long history of financial irresponsibility, but Europe’s great experiment with monetary union has been propelled more by politics than economics. Once in the union, Greece’s politicians took advantage of the stability it brought not to reform and improve competitiveness but to amass debt at low rates of interest to fund a bloated and pointless civil service. Meanwhile, the rest of Europe turned a blind eye, lacking the political will to follow the very rules they designed to prevent emerging crises the Greeks were in the process of creating. Then after the financial crisis, when the depth of the Greeks’ debt woes became all too apparent, Europe’s leaders dithered again, delaying action until the debt crisis had already raged around Europe. Even when they finally did something – with an EU/IMF bailout in May 2010 – the euro zone leadership failed to heed warnings that the rescue plan was still falling short of what Greece needed. In other words, at every step in Greece’s experience with the euro zone, it exposed the tragic flaws built into the design of the monetary union.

Because of that, the Greek tragedy is potentially tragic for all of us. A default by Athens, whether part of a second, EU bailout or not, will likely spread new waves of contagion across the euro zone. Spain’s borrowing costs have already been on the rise as the Greek crisis has intensified. That means the euro zone could require more bailouts to dodge more defaults, which would put the euro itself at risk. Losses on their holdings of sovereign bonds would eat into the balance sheets of Europe’s major banks, undercutting the strength of the continent’s financial system. Shockwaves would ripple around the world as jittery investors fled stocks and other assets in a renewed quest for safe havens.

Perhaps the most heartbreakng part of this Greek tragedy, though, is the impact on the Greeks themselves. Above all, the financial crisis slamming into Greece is a human tragedy. The Greeks are already facing their third consecutive year of economic contraction in 2011, and the outlook is grim. The road ahead is pockmarked with feeble economic prospects, joblessness, deteriorating government services, and a lower standard of living. There is little beyond venting their anger on the streets that the Greeks can do about it. Whatever happens as the crisis unfolds – whether Athens defaults or not, whether the country sticks with the euro or ditches it – years of painful reform and austerity measures to straighten out the nation’s finances are unavoidable. Like the classic Greek tragedies of old, the players in this modern drama can’t avoid their tragic fate.

It’s a tragic end that most of the world’s richest countries may face as well. What’s happening in Greece is a window into the future of the West. True, the U.S., U.K. and other debt-heavy nations may never tumble into crises as severe as Greece’s. America, for a host of reasons, is not Greece. But the Americans, Brits, French, Italians and most other Westerners can’t avoid the budget cuts and potentially lower living standards the Greeks are suffering through today as governments across the developed world will inevitably be forced to restore order to their shattered finances. It’s the price of living beyond our means like the Greeks have done. Those painful adjustments will have to be made as the West confronts a challenge to its dominance and competitiveness from a rising East. The Greeks need to reform their economy to have any hope of a bright future. So does the rest of the West.

Centuries ago, Greece was the leading light of Western civilization. Now Greece may be leading the way towards the decline of that civilization, at least economically. It’s enough to make Antigone cry.