Fiddling While Greece Burns

There is no shortage of troubles in the world today. In Iran, centrifuges whirl, enriching fissile material and imperiling security. U.S. Middle East envoy George Mitchell has stumbled and faltered in achieving peace, or even peace talks, in Israel. And the group of failed states is no longer a very exclusive club.

No wonder few observers seem to appreciate what trouble the coming fiscal adjustment in Europe — with Greece but the thin edge of the wedge — will bring. For some time to come, European leaders will need to scramble for funds to repay those who lent to improvident governments. But this is about more than billions of euros and percentage points of GDP. It is about national cohesion and social alienation. Those same leaders should recognize that it is in their self-interest to cushion the blow of economic adjustment on the disaffected and to protect European citizens from those who will fall through the cracks.

The Greek economy has been on a path to insolvency for some time and now teeters on the brink; the Greek government owes its creditors an amount equal to 110 percent of GDP. Meanwhile, the debt of Greek households has climbed to 50 percent of national income. The potential resolutions of this Greek economic tragedy range from bad to worse. In principle, the government could default, reminding investors that the responsibility for due diligence is theirs. That default would likely result in significant political turmoil and the temporary seizing of global capital markets — an ominous possibility.

A far more likely solution, already in the works, is a pan-European bailout. Governments with stronger hands (such as France and Germany) and their financial institutions will backstop profligate Athens and hope that they do not have to do so elsewhere in the Mediterranean. Debtors will be paid; the Greek government will have new loans to pay off; it will implement austerity budgets further contracting the Greek economy. In economic parlance, these austerity budgets will be part of the "conditionality" of the loans. Greece’s unemployment rate will rise into the double digits and wages will drop. Meanwhile, Greek goods and services will gain an advantage in the single-currency European Union. Years from now, the economy might turn around.

The need for fiscal realignment will not be limited to Greece, as global investors will become wary about imbalances across the continent, implying broad economic contraction. Those only marginally attached to the workplace — namely, immigrants and the young — will never get to start up the ladder of success, as they will be the last hired and the first fired. The demographic group in question is massive, with immigrants alone accounting for 85 percent of Europe’s population growth between 2002 and 2007. The young are in trouble as well. Today, 20 percent of under-25s are unemployed. In Spain, a plausible next domino, 40 percent of under-25s have tried and failed to find work. Those unemployed in their youth often bear a long-term scar, as their wages lag behind the rest of the workforce for at least a decade.

There is a more immediate problem: These vulnerable groups are also impressionable ones. Personal experience might convince them that market economies do not value them. Unemployment is the grist of extremism, in that an increase in those out of work is generally associated with greater support for far-right groups. History shows that the disaffected can move far from the civilized center, as in Germany in the 1930s or the Palestinian territories today. The current outlets for such anger span the range from religious fundamentalism (read: Islamist terrorism) to perverted nationalism (read: Timothy McVeigh).

There is a presumption among the elite that such people do not matter because their activities cannot be coordinated by a central intelligence. Do not worry about a secret grand plan for world domination or black-shirted brutes blocking traffic. Worry instead, in the elegant phrase used by the Spanish officials investigating the devastating, regime-changing Madrid bombings, about "inspiration." The Internet, in particular, harbors dark pools of hate to provide direction and a shared sense of purpose to people who need never physically meet. They can learn from each other. And they have a vehicle to impress each other: violence.

Thus, more is at stake than whether bankers or other investors get paid back in full. The international community should appreciate that, whatever the merits of austerity, there are compelling reasons to worry about the marginalized. And as European leaders look to cut spending to the bone, there are some line items, such as defense and internal security, they should keep fully funded.