Could the endgame of this Greek tragedy be a eurozone breakup? The single currency's supporters maintain that such an outcome is mere mythology.
Greece accounts for only 3 percent of the 16 member states' combined GDP, they say, and has lower debts than some of the banks bailed-out during sub-prime. A loan of E20 billion (£17.5 billion) would do the trick, we're told. That's less than the British government injected into either Lloyds or the Royal Bank of Scotland.
Such analysis sounds vaguely plausible. But its naïve and politically dishonest. Then again, the single currency was built on political dishonesty. That's because, at the heart of the eurozone project there was always a fundamental contradiction -- one that the architects of monetary union never dared to address. Now its being highlighted for them, whether they like it or not.
While the European Central Bank controls eurozone interest rates and the money supply, the size of each country's fiscal deficit results from the spending and taxation decisions of its own sovereign government.
How can you enforce collective fiscal discipline in a currency union of individual sovereign states, each answerable to their own electorate? The truthful answer is you can't -- not unless you subjugate the autonomy of democratically-elected politicians and, by proxy, their voters.
Voters don't like that. Neither do politicians. Faced with a choice between seriously annoying their own voters and seriously annoying the ECB, the most ardently "pro-European" lawmakers, even those with years of Brussels trough-nuzzling under their belt, will always side with their own. That's why the eurozone will ultimately break up -- whether Greece is bailed out or not.
The eurocrats blame "speculators" for the single currency's woes. That's a bit like sailors blaming the sea. The eurozone is ultimately doomed because, in the end, economic logic wins and the will of each country's electorate bursts through. This current Greek saga won't end the eurozone -- but future historians will identify it, perhaps, as the beginning of the end.
Many have said it's hardly surprising that Greece -- with its history of financial profligacy and capital flight -- has emerged as the eurozone's Achilles heel. A more germane observation is that, while fiscally wayward, Greece is also the birthplace of democracy. If the Greek population wants to get upset, throw out its elected politicians and reject austerity, it must be allowed to do so. I think they'd be mad, but it must be their choice.
If Berlin and Brussels try to impose their own view on Greece and the "cuts" come from outside, the situation will become absolutely incendiary. Protests will turn into full-blown riots. Greece will endure very serious social unrest. Deep-seated rivalries and suspicions between countries will be re-ignited. And for what?
"The Greek Tragedy That Changed Europe", The Wall Street Journal, February 13, 2010
"A Theory of International Currency and Seigniorage Competition", Yiting Li, September 2005
"How to Cut the Seigniorage Cake into Fair Shares in an Enlarged EMU", Jørgen Drud Hansen and Roswitha M. King, December 22, 2004
"The Enlargement of the European Union and the Redistribution of Seigniorage Wealth", Holger Feist, January 2001
"Eurowinners and Eurolosers: The difference of seigniorage wealth in EMU", Hans Werner-Sinn and Holger Feist, June 1, 1997