Suppose Greece Works

New Democracy’s Antonis Samaras’s party won the national elections in Greece. But it did not win a majority. His pro-austerity party will try to create a coalition now. The odds appear to in his favor. But global capital markets investors and economists say, in increasing numbers, that Greece may embrace austerity, and without a positive or negative effect on the balance of Europe. Greece is too small. Spain, though, is not. The country has started to slide into recession and cannot raise money at reasonable rates. Unlike Greece, Spain is almost too large to bail out. And Italy could follow Spain into trouble. European countries and the International Monetary Fund do not have the reserves to handle both Italy and Spain together.

However, suppose Greece works? Suppose that the leaders of the G20 nations, who will meet this week, look at Greece as a template. It accepted austerity, no matter how much voters want to keep their pensions and jobs that pay them too much. Spain and Italy could match that. If both nations are willing to chop their national budgets, even Angela Merkel of Germany would support bailouts. These nations in Europe would get the money they need and all the supervision that the IMF and European Central Bank can muster to make sure there are no deviations from budget plans.

Greece might work in another direction, too. Now that Europe and the IMF have gotten the nation to knuckle under, countries led by the United States and France may point to Greece as an example of austerity accepted along with what will become a deepening recession. The second lesson from Greece that the G20 and ECB must consider is that Greece will exchange loans for membership in the European Union, while at the same time its gross domestic product continues to contract at 5% or better and unemployment rises quickly beyond 20%. The U.S. and France have made the forceful argument that once budget cuts are in place, they must be implemented along with stimulus. Merkel says that is impossible. How can a nation take money out of its budget and invest money at the same time?

The response to that puzzle is terribly complicated. The EU, IMF and ECB can supervise stimulus as closely as they do budget cuts. Investment can be made in sectors most likely to trigger a recovery. And, carefully watched, the money can be kept out of the hands of those who have wasted government funds while avoiding taxation for so long.

Greece has decided to accept austerity. The future negative impact of that is clear. The bailout will not keep Greece in the EU if its economy implodes. It will require an investment just to get its GDP back to zero growth.

Douglas A. McIntyre