SMITH BRAIN TRUST -- Though successfully scraping together a 200 million euro repayment to the IMF, Greece will struggle to cover the 770 million euros due to the IMF by May 12, the Associated Press reports today. Bill Longbrake, executive-in-residence at the University of Maryland’s Robert H. Smith School of Business and Center for Financial Policy, says the Greece crisis can be viewed in the short term as a “skunk at the party” – the party being optimism blossoming from the positive effect of Europe’s quantitative easing monetary policy. “A sense of better days ahead is reinforced by such developments as a plunge in the value of the euro, the collapse in oil prices, sharply easing credit conditions, and the ebbing of fiscal austerity,” Longbrake says.
But in the longer view, Greece is “a canary in the coal mine," says Longbrake. “Its condition and crisis is the direct result of deeply embedded flaws in the European Union and the economic policies of its most prominent member, Germany (see “Germany’s Economic Model and Policies” on page 29 of the monthly Longbrake Letter). The EU cannot tax citizens of member countries directly, “and there is no provision for fiscal transfers from countries with strong economies to countries with weak economies except through onerous bail-out agreements complete with intrusive, and often counterproductive, conditions,” Longbrake says. “Fiscal transfers are essential to address differentials in economic performance. Such transfers occur automatically in the U.S. with virtually no notice.”
Subsequently, Greece running out of money to pay wages, pensions and debt service payments "is a product of four years of unrelenting austerity in the face of creditor demands, ongoing economic depression that has destroyed more than a quarter of Greece’s GDP and driven unemployment above 25 percent, is on a collision course with unyielding creditors, principally Germany and the International Monetary Fund, which are demanding further austerity in return for additional funding," he says. But look for such “moment of apocalypse” to be “pushed back by half measures that buy more time but do little to address the underlying problems.”
“Greece’s political leadership is in a difficult position because the electorate wants to remain in the EU,” says Longbrake. “But unless the EU shows flexibility on repayment of debt and economic reforms, history indicates that Greece would be better off in the long run exiting the euro and reinstating and devaluing the drachma.” There is little doubt that exiting the euro would be enormously painful (for Greece). “But there is strong reason to expect that in time Greece’s economy would revive and grow rapidly.”
Read more on Longbrake’s analysis of Europe’s long-term prospects and the threat posed by Greece’s acute financial crisis here.