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Opinion: Greek debt crisis a hazard for EU

Should Germany and the EU bail out Greece? It poses serious questions.

A display of European currency exchange rates in the Bank of Greece in Athens February 11, 2010. (John Kolesidis/Reuters)

WASHINGTON — The Greek membership of the eurozone has never been easy.

While other EU countries either adopted the euro or chose not to do so, Greece was the only EU country that wanted to join the common currency area at the outset, but could not.

The Greeks were keen to jettison the drachma because of their past experience with inflation and devaluation. Giving monetary authority to the European Central Bank would eliminate those two problems.

The rest of the eurozone, however, kept Greek ambitions in check for two years because of concerns over Greece’s fulfillment of the Maastricht criteria, which includes stringent limits on the levels of inflation, budget deficits and national debt.

Eurozone members worried that Greece was not sufficiently committed to fiscal rectitude. They were right. Soon after Greece joined the euro, in 2001,  it emerged that the Greek government lied about its deficit. Like Max Bialystock in "The Producers," the Greeks simply cooked their books.

The eurozone is a strange beast. While the monetary authority (to print money) rests with the German-dominated CEB in Frankfurt, fiscal authority (to borrow and spend) rests with the individual national governments. True, the Maastricht treaty sets out limits on national budget deficits and national debt, but those have been watered down and, sometimes, ignored. (The French come to mind.) So, in its defense, Greece is not the first eurozone country to give financial responsibility the middle finger.

That separation of fiscal and monetary policies creates an interesting problem. A country may enjoy monetary stability that comes from the combined strength of the eurozone’s 16 economies and from the credibility of the ECB, while at the same time undermining that very stability and credibility by having an unsustainable fiscal policy.

And that is precisely what happened when it became apparent that in addition to its national debt of 113 percent of the GDP, the Greek government has, yet again, lied about its budget deficit. The Greek discrepancy was hardly a rounding error, the deficit was 12.7 percent of the GDP in 2009 and not 4 percent as previously declared.

What is the solution? One option is for the Greek government to significantly cut spending. Considering the mass protests in recent days, the markets are understandably skeptical about the Greek government’s ability to do so.

Another option is to let the Hellenic Republic — and other spendthrift countries like Spain and Portugal — default on its debt and suffer the financial consequences. The last option is to bail Greece out with the money of German taxpayers or some other financial guarantees.