Should EU threaten Greece?

2011-06-26

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The troika (EU, ECB, IMF) has issued for some time now a clear threat to Greece that unless a new package of stricter austerity measures is approved by the Greek Parliament and implemented by the government, there will be no more money, as the July tranche of loans from the first memorandum, will not be submitted. The troika openly threatens Greece with bankruptcy should new austerity measures not be agreed upon on June 28th.
The question though is whether this is an effective way of putting forward any sincere argument for cooperation, especially since the side who seems mostly affected by the current crisis is the euro and the EU as a whole, who will lose much more than Greece will in the case of default.
In the incident of default, Greece will practically lose its ability to loan money as the government bonds will not be trusted by the markets, it will not be in a capacity to import goods and services since the drachma will be much devalued in comparison to the other major currencies. In short, a default implies that the country will have to rely on its own resources, which in the case of Greece are enough to provide the grounds for a transitory period from bankruptcy to recovery.
On the other hand, the EU will lose at many levels and the exact impact of those losses is unpredictable, thus making it even worse as expectations will be from the outset quite negative. Major European banks who are exposed to Greece and who are already witnessing liquidity problems, will face a serious threat of running out of cash which will potentially jeopardize their operations and lead to financial panic across the whole of the EU, partially thanks to the interconnectedness of the European banking system. Apart from the immediate impact arising at the financial sector, the European market will also be hit by the expectable negative reaction of the markets and the downgrades by the major credit rating agencies.
At another dimension, the European South will be heavily affected by the readoption of the Greek national currency as this will make the Greek products much cheaper than those of its euro competitors. Important sectors of the economy such as tourism and agriculture, will be badly hit, as the equivalent Greek products (which are of the same quality) will be much more favorable. Hence there will definitely be a spiral reaction of “beggar thy neighbor” policies that will eventually force the entire European South into action that will surely be to the detriment of the single currency and the way the EU currently works.
These are only a few of the effects on the European Union but certainly do offer the general picture of disintegration.
Taking the above into consideration and evaluating all aspects of the situation, it appears that the troika (EU, ECB, IMF) threatens Greece only to deny its own responsibilities and only to avoid sharing its part of the burden. After all the crisis is a Euro/European crisis and not just a “Greek crisis”. European countries are all binded together and what is bad for one member-state is bad for all. So in that sense the troika should not threaten Greece as it is not politically correct and they should also not do so since it might come back to them as a boomerang. The logic of issuing threats is catastrophic, but if there was a party who should be “threatening” that should be Greece as it is the party who loses the less out of this situation.</div>