The European governments and bankers must dispense with the notion that Greece has a liquidity problem and deal with the fact that the problem is one of solvency that will require major debt restructuring and major additional austerity measures, while it has no access to the credit markets. Again we see the absolute necessity of dealing with a revised social contract, one that was based on totally unrealistic expectations of entitlement. Greece’s productivity numbers tell the story: approximately $34 of goods and services produced per hour worked, compared to $53 in Germany and $57 in the U. S., with approximately one-third of its workforce employed by the state. After 150 years of the pursuit of socialist theory, how much more evidence do we need of its inevitable failure to do anything but impoverish the people? Yet we continue to pursue hope over experience. Greece’s default is a matter of when, not if, so get ready for the haircut.
Meanwhile, the EU and the Euro will probably survive and struggle along, because Greece represents only less than 3% of EU GDP, but it must face some new realities, mainly political. It was never organized as a political entity, but as a monetary union without fiscal consistency, rather like the fledgling U. S. under the Articles of Confederation, with the same weaknesses. After ratification of the U. S. Constitution, Alexander Hamilton’s plan for assuming all state debt at the federal level and creating a market for U. S. Treasury securities in effect established the principle of U. S. federalism in economic policy and provided stability for the dollar. It seems that Europe needs to find its Hamilton.