Perhaps the long match between the ECB and the German government is producing a deal (proposed by France) that may save Greece, for the time being, from a sovereign default, with subsequent defaults by banks and enterprises. There will be no haircut of government bonds (ECB) but a “voluntary” participation by French and German banks (others will surely follow), with a renewal of expiring bonds, reinvested at 90% throughout a financial vehicle in thirty years bonds.

The scheme formulated by France is reminding of the Brady bonds used to manage the crisis of Latin-American countries in the nineties. The problem is that even with an interest rate of 5.5% it is not sure that Greece will be able to serve the debt’s burden. The point is the perspective of growth of the economy; Greek GDP went down in three years by almost 15%, and the budget cut will undermine the growth of domestic demand. May Greece become an export-led country like German?

This question is not limited to Greece; the same question applies to all Mediterranean countries, but not only those; also France may be considered a Mediterranean country since the France's commercial balance shows a deficit, malgré a lower oil import because of the nuclear energy.

Calculating, from Eurostat, the excess of import over export in percentage (2010), we find:

Greece       40.4%
Portugal     23.1%
France          9.2%
Spain           8.2%
Italy               6.6%

On the other side, in Germany the excess of export over import is 12.9%. This is the reason why Germany had a strong recovery after the 2009 fall in industrial production and GDP. For the other countries growth must come from domestic demand, that is from consumption and investment (which depend in a good part on consumption). But the recent agreement on public budgets obliges countries to cut the excess debt (over 60%) by 5%, a part from Greece.

The simultaneous restrictive policy by almost all European countries brings about a deflationary effect on growth perspectives. Here we can see the same economic ideology at work, which was already present  at the time of the Stability (and Growth) Pact of 1998. The idea is that problems may come only from the public deficits; if we establish tight rules impeding excess deficits, then the economy will go on steadily. Of course now everybody knows that the crisis went from the financial markets, but since the consequence was an increase of public debts, the idea is still that in order to re-establish confidence public budgets must be balanced quickly.

The expansive effects of restrictive budget policy is an anti-keynesian theory which gained momentum in the eighties, but now even supporters of this theory have some doubts. It may be that German consumers are reassured by a thigh budget policy (now by Constitutional law), but I would not bet on this hypothesis for other European countries.

Before euro, there was a classic solution for Greece, and other Mediterranean countries, namely devaluation. One of the reasons that pushed Germany to accept Italy’s participation to euro was that in this way the frequent competitive devaluations would come to an end. Is a similar perspective a feasible option open to Greece?  According to some experts, Greece should sort out from the UE, with all the consequences, and to cope with a huge financial crisis, even greater that the present one.

Amartya Sen http://www.insightweb.it/web/adm_views wrote : “It is no consolation for me to recollect that I was firmly opposed to the euro, despite being very strongly in favour of European unity. My worry about the euro was partly connected with each country giving up the freedom of monetary policy and of exchange rate adjustments, which have greatly helped countries in difficulty in the past, and prevented the necessity of massive destabilisation of human lives in frantic efforts to stabilise the financial markets. That monetary freedom could be given up when there is also political and fiscal integration (as the states in the US have), but the halfway house of the eurozone has been a recipe for disaster. The wonderful political idea of a united democratic Europe has been made to incorporate a precarious programme of incoherent financial amalgamation”.

The problem of a domestic driven growth of UE was at center of Delors White Paper in 1993. His proposal was not a simple Keynesian demand pull policy, since the European investments  had also the aim of increasing the productivity. Giuliano Amato and Guy Verhofstadt present now a proposal ((http://www.insightweb.it/web/adm_views), based on Stuart Holland work ( European Bonds, Eurobonds and a new New Deal for Europe) and endorsed by many political leaders, which goes in the same direction. The problem is the political will of a European community non short sighted.