Greece – a threatening scenario looming

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This article is a guest contribution by Dr Stefan de Vylder*, well-known Swedish economist.

Once upon a time a group of friends formed a club with certain common rules for economic behaviour. No-one was – in theory – allowed to incur debt above a level established by the statutes. And no-one was allowed to leave the club. Both rich and poor friends were granted membership, but thanks to the solid economic position of the wealthier members, every member of the club was regarded as creditworthy. The rather indolent banks were, for a long time, of the opinion that no member of such a fine club could ever default on its debt.

As time went by, more and more members were welcomed into the club. After ten years the membership reached seventeen. But by then the cosy atmosphere had been replaced by rising tensions, largely as a result of growing income disparities between the individual members. One of the members had become a multimillionaire, another a well-to-do physician. The club also contained a couple of teachers and nurses. But there were also a couple of construction workers who had lost their jobs in the wake of a financial crisis as well as a careless fellow, who had never learned to manage his own economy.

Now even the banks began to have cold feet. Perhaps some of the members of the club suffered not only from illiquidity, i.e. a temporary lack of liquid funds, but also from insolvency, i.e. are unable to service their debts even in a medium-term perspective?

The wealthier members of the club were increasingly concerned. Things were not working smoothly any more. The annual midsummer parties were not what they used to be.

To postpone the day of reckoning, the club began to extend loans to the poorer members.

The richer members – who just a couple of years earlier had applauded the rising consumption and welfare among the poorer ones – started to bully their less fortunate friends. “You have been living beyond your means”, they shouted in chorus. “Lazybones!” To extend new loans – at a high rate of interest – the club’s board of directors demanded a reduction in the order of 20-30 per cent of the poorer members’ disposable incomes. “But if we do that, the real burden of our debts will be even heavier, and more difficult to service”, whined the low-income and unemployed members. “That is your problem” was the answer.

One board member however raised a pertinent question: “Is it really our responsibility to bail out our poorer members? Shouldn´t the banks, who have lent so much without asking questions about the borrowers’ creditworthiness, be forced to foot part of the bill?”

“No way”, said the board majority. “A debt restructuring would make the financial markets more nervous. The important thing is to make sure that the banks get their money back. A better solution is to put our destitute friends under guardianship and force them to pay.”

Such clubs do not exist, the reader might argue. But unfortunately, we have such a club: The European Monetary Union, EMU. A club with the wrong membership and an incompetent management. To create a monetary union with a large number of countries with completely different economic conditions and development paths, but with a common currency and a common rate of interest, is simply not good for the maintenance of friendship between the member countries. What we have seen so far of mutual accusations, rising nationalism and even ugly xenophobia is just the beginning. The EMU is set up for conflict.

Click here for the full article.

Source: Dr Stefan de Vylder, June 26, 2011.

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