New statistics out of Greece show that austerity shrunk the economy more than expected last year. GDP in Greece fell 6.8% in 2011, and a slightly faster 7% in the fourth quarter. The country is in a fifth straight year of recession, and the numbers are rapidly approaching a full-on depression.
So of course, the solution was to ink a deal with European leaders for more austerity. But it appears that Eurozone finance ministers may save Greece from the road to ruin, by forcing default and the likely consequence of an exit from the euro.
Eurozone officials have called off an emergency meeting of finance ministers to approve a vital €130bn bail-out for Athens amid a growing fight among the country’s European creditors about the merits of allowing Greece to go bankrupt [...]
Olli Rehn, the European Commission’s top economics official, warned there would be “devastating consequences” if Greece defaulted, and pleaded for eurozone governments to approve the bail-out quickly. Officials said Mr Rehn has support from the European Central Bank and the French government.
But a group of eurozone governments, particularly those that retain triple-A credit ratings, has lost faith Greece will ever deliver its end of the bargain. Hardline officials in Germany, the Netherlands and Finland are increasingly urging a Greek default.
“We are getting closer to default,” said a senior eurozone official. “Germany, Finland and the Netherlands are losing patience.”
Obviously Germany is the important actor here. If they want Greece to default, they will in all likelihood default. Germany believes – probably wrongly – that they have built a firewall to stop contagion from hitting the rest of Europe. But the larger issue is that Greece is trapped inside the euro, with its citizens doomed to massive suffering unless the Eurozone either really becomes a fiscal union, or lets them go. Right now sentiment appears to be moving toward the latter.
Why does Greece – a country with little more than 2 per cent of the eurozone’s gross domestic product – cause such headaches? [...] Greece itself, though an important irritant, cannot be decisive for the future of the currency area. Yet the fact that this small, economically weak and chronically mismanaged country has been able to cause such difficulty also indicates the fragility of the structure.
And so the solution is to change the structure in some fundamental way. Because the status quo will devastate Greece, if not much of the continent. Portugal has largely agreed to European demands to impose more austerity, and their debt-to-GDP load has only grown as their economy has shrunk. Italy has entered into an austerity-induced recession. And the entire Eurozone saw its GDP shrink by 0.3% in the last quarter, putting it one quarter away from an officially declared recession.
Kevin Drum offers the solutions, which haven’t changed for years – fiscal union or monetary union breakup. The other option is to muddle through, with austerity-induced recessions everywhere and needless suffering. That’s the current path.