- Market Commentary -

February 16, 2010 (FinancialWire) (By Philip Holmes) — Greece may be a small part of the European economy, but its troubles are making big waves around the world. Now we hear that everyone’s favorite company, Goldman Sachs (NYSE: GS) may have hand a hand in making the mess worse by hiding the full extent of Greece’s debt woes. Plus, is Paul Krugman calling for abandonment of the euro? What gives?

As Krugman and others point out, Greece is not only suffering from the general economic downturn, but also for a decade’s worth irresponsible government spending. The latest revelation is that the Greek government sought to hide the full extent of its debts, and may have conspired with Goldman Sachs to do it.

As Sam Fleming reports in the UK Daily Mail, “The Wall Street giant is claimed to have reaped as much as £192million in fees by entering a complex currency transaction in 2001 that helped Athens borrow cash without putting it on the books as a loan.”

Greece is already in the dog house for violating the covenants all Eurozone members agreed to: they can run deficits of no more than three per cent of gross domestic product, plus they have to keep national debt to less than 60 per cent of GDP. Greece is running a deficit of almost 13 per cent of GDP, with public debt at 113 per cent of GDP.

By itself this profligacy would be worth a major slap from Brussels, but the allegations of crony capitalist deals with the Americans add major insult to injury.

What to do?

Krugman zooms back and sees the entire Euro project as something of a failure. According to Krugman, “For the truth is that lack of fiscal discipline isn’t the whole, or even the main, source of Europe’s troubles…” Not even Greece’s. He says, the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites — specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment.”

Smaller EU economies, such as (otherwise responsible) Spain, would right now benefit from having the ability to devalue their own national currencies. Instead, as Eurozone members, they face draconian austerity measures and grinding deflation.

Krugman’s big beef these days seems to be with deficit hawks, who ignore Keynesian calls to ignore deficits for the time being in order to re-inflate national economies.

One thing seems clear, though: As Eurozone members, neither Spain nor Greece is in any current danger of undertaking a military coup or civil war as a result of current crises. This would likely not have been the case just 35 years ago, had similar economic circumstances prevailed.

And that points out the true purpose of currency integration in Europe: it was part of a larger project aimed at political stability and the avoidance of war. Sure, economists are right to point out that such grandiose schemes involving money and economic integration should be seen in a purely economic light. But as Krugman well knows, separating politics from economic policy is a dream that only the sheltered and the simple dare dream.

[Go to http://www.financialwire.net/?s=philip+holmes to see more commentaries by Philip Holmes.]

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