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ONLY THE START

The euro was trading around $1.50 at the beginning of December. By the end of March, it was down to $1.35 — it had lost 10 per cent of its dollar value in four months. Although the European Union has a central bank, it does not intervene in the exchange market like the Reserve Bank of India; it is the market that has marked down the euro. It fears the outcome of the developing Greek crisis. In December, Greece disclosed that it had been lying about its national debt, which was twice as high as it had been made out to be. Not surprisingly, the credit rating of the Greek government nosedived; it became that much more difficult to finance maturing debt payments. In February, the Greek budget was placed under the supervision of the European Commission to restore confidence in the figures. But the EC needed a go-ahead of the heads of State before it could mount a rescue.

They met in Brussels on March 26. There, Angela Merkel refused to support a bailout for Greece. That was a turning point. It signalled the end of Germany’s role as champion and protector of the EU which it has played steadfastly since the formation of the union. It means that Greece has to choose before long between declaring bankruptcy and tightening its belt unbearably. Just how much it would have to tighten its belt can be judged from the fact that its public debt is over $400 billion, 25 per cent more than its gross domestic product, and its external debt is over $550 billion, 75 per cent more than its GDP. With government revenue over $100 billion, Greece could perhaps continue to service its public debt. But it is doubtful that its balance of payments can bear the strain of debt servicing. Since Greece is a member of the EU, it has no currency of its own. Hence devaluation to improve the BoP is out of the question. The only way it can be improved is by reducing domestic demand. If the government does not do this by taxing more or spending less, the rest of the economy will have to undergo a contraction of incomes and jobs. If imports shrink as a result, that would help the BoP.

But here too, Greece faces a peculiar difficulty. It is the world’s greatest maritime nation; its biggest export is shipping services. And ships are not anchored in Greece’s harbours. They can go and be domiciled anywhere. If the fortunes of Greece look uncertain, its shipowners could well go and register their ships in other countries; that would deprive Greece of ships’ earnings. So it is difficult at the moment to see how Greece can avoid default and bankruptcy. That may not be the end, but the beginning of a sequence that cannot be imagined.

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