The Greeks are going on a general strike.
Here is the question: Will the European governments ever learn?
Jeff Frankel counted 3 mistakes made by the ECB:
Mistake number 1 was the decision in 2000 to admit Greece in the first place. The country was an outlier, geographically and economically. It did not come close to meeting the Maastricht Criteria, particularly the 3 % ceiling on the budget deficit as a share of GDP. No doubt most Greeks would agree with the judgment that they would be much better off today if they were outside the euro, free to devalue and restore their lost competitiveness.
The second mistake was to allow the interest rate spreads on sovereign bonds issued by Greece (and other periphery countries) to fall almost to zero during the period 2002-2007. Despite budget deficits and debt levels that far exceeded the limits of the Stability and Growth Pact, Greece was able to borrow almost as easily as Germany.
The third mistake was the failure to send Greece to the IMF early in the crisis, before Greek interest rates went to 600 basis points (see graph). By January 2010 the need to go to the Fund should have been clear. Rather than going into shock, leaders in Frankfurt and Brussels could have welcomed the Greek crisis as a useful opportunity to establish a precedent for the long-term life of the euro.
It is clear now that Euro is a big mistake for the periphery countries as it takes away sovereign monetary policy. The situation is made worse when the European leader treat it only as a debt issue and not addressing to the shock that the countries have been subjected to. When forced with a fixed exchange rate (Euro) and free capital movement (EU Treaty), policy won’t be able to respond to national needs, and thus we have a recipe for civil unrests. Basically, European leaders are ignoring (or ignorant of)the Mundell-Fleming Trilemma.
We also have the Rodrik Trilemma to think about: deeper economic integration, democracy, and national-state sovereignty are another set of impossible trinity; you can have two at the same time, but not all three. Europe, being led by the staunch German, is doubling down on economic integration by backing up the use of the Euro and national-state sovereignty by not creating a transfer union, so what is missing, ironically, is the same thing Europe missed during 1930s: Democracy.
What Europe experiencing now is a Kobayshi Maru testof its own, and the only way to win to change the parameters. Europeans are unlikely to pick up this solution, so long as their heads are still buried in the sand.