Op-Ed Contributors

Greek lessons for the world economy

By Dani Rodrik (China Daily)
Updated: 2010-05-14 07:52

Greece benefited from a common currency, unified capital markets, and free trade with other EU member states. But it does not have automatic access to a European lender of last resort. Its citizens do not receive unemployment checks from Brussels the way that say Californians do from Washington, DC, when California experiences a recession. Nor, given linguistic and cultural barriers, can unemployed Greeks move just as easily across the border to a more prosperous European state. And Greek banks and firms lose their creditworthiness alongside their government if markets perceive the latter to be insolvent.

The German and French governments, for their part, have had little say over Greece's budget policies. They could not stop the Greek government from borrowing (indirectly) from the European Central Bank (ECB) as long as credit rating agencies deemed Greek debt creditworthy. If Greece chooses default, they cannot enforce their banks' claims on Greek borrowers or seize Greek assets. Nor can they prevent Greece from leaving the eurozone.

What all this means is that the financial crisis has turned out to be a lot deeper and its resolution considerably messier than necessary. The French and German governments have grudgingly come up with a major loan package, but only after considerable delay and with the IMF standing at their side. The ECB has lowered the threshold of creditworthiness that Greek government securities must meet in order to allow continued Greek borrowing.

The success of the rescue is far from assured because of the magnitude of belt-tightening that it calls for and the hostility that it has aroused on the part of Greek workers. When push comes to shove, domestic politics trumps foreign creditors.

The crisis has revealed how demanding globalization's political prerequisites are. It shows how much European institutions must still evolve to underpin a healthy single market. The choice that the EU faces is the same in other parts of the world: either integrate politically, or ease up on economic unification.

Before the crisis, Europe looked like the most likely candidate to make a successful transition to the first equilibrium - greater political unification. Now its economic project lies in tatters while the leadership needed to rekindle political integration is nowhere to be seen.

The author, professor of Political Economy at Harvard University's John F. Kennedy School of Government, is the first recipient of the Social Science Research Council's Albert O. Hirschman Prize. Project Syndicate

(China Daily 05/14/2010 page9)

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