"Lehman Brothers squared": what's at stake with Greece.

Author:Berry, John M.

In the aftermath of World War I, the victorious, vindictive allies gathered for a peace conference at the Versailles Palace outside Paris. There, they realigned many international boundaries and imposed reparations on a defeated Germany that were far in excess of that country's ability to pay. Now, in a sense, the shoe is on the other foot.

Germany, not as the victor in a war but with power gained from being by far the strongest economy in Europe, is demanding that a profligate Greece repay debts owed largely to other nations in the

European Union that the Greeks cannot pay without further beggaring themselves. An attempt to do so, in the view of some observers, could lead to a truly radicalized political result.

As Martin Wolf, the renowned columnist for the Financial Times, wrote recently, "What cannot be paid will not be paid."

What is ultimately at stake for Europe is far more than the future of the battered Greek economy. The new Greek Prime Minister Alexis Tsipras and his leftist Syriza Party won control with campaign promises to relieve the onerous austerity imposed on the country by lenders--a troika comprising other EU countries led by Germany, the European Central Bank, and the International Monetary Fund. German Chancellor Angela Merkel and numerous other German officials reacted to Syriza's victory with shrugs. The Greeks owe the money and must repay it, they declared.

Yanis Varoufakis, the new Greek finance minister, prepared a statement before meeting with his German counterpart, Wolfgang Schauble, in which he recalled the economic chaos in Germany that followed World War I and helped bring the Nazi party to power. "I think that the German nation is the one nation in Europe that can understand us better than anyone else," Varoufakis declared. Schauble gave no sign he regards that history as relevant.

Later, the new government's foreign minister proposed that Germany pay further reparations for the immense damage Greece suffered during World War II. That was immediately rejected by German authorities. And the new Greek defense minister said that if European countries would not continue to finance Greek debts, some other source of funds might found, perhaps the United States, China, or maybe Russia. Certainly Russia, already suffering from a recession and a severe outflow of hard currency as a result of plunging oil prices, is in no position to help.

In mid-February, negotiations between Greece and the current lenders appeared to be at an impasse: EU representatives were demanding that the current program be extended without change, while Varoufakis argued that the program must be replaced with one that will allow the deeply depressed Greek economy to grow again. The only alternative to an agreement is for Greece to leave the eurozone. Most Greeks, including Tsipras, clearly don't want that to happen. It might be devastating for Greece, perhaps with its banks failing. That outcome could also badly damage other weakened members of the union as investors speculate about which other country might also be forced to drop the common currency.

Barry Eichengreen, an economic historian at the University of California at Berkeley, said at the annual meeting of the American Economic Association in January that a Greek exit would generate massive financial turmoil. "In the short run, it would be Lehman Brothers squared," he said. Given that prospect, he expects compromises will be reached. "While holding the eurozone together will be costly...

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