Why Europe needs to save Greece

Financial Mirror (Cyprus) - - FRONT PAGE -

The fun­da­men­tal prob­lem un­der­ly­ing Greece’s eco­nomic cri­sis is a Greek prob­lem: the coun­try’s deep-rooted un­will­ing­ness to mod­ernise. Greece was sub­ject to a long pe­riod of dom­i­na­tion by the Ot­toman Em­pire. Its en­trenched po­lit­i­cal and eco­nomic net­works are deeply cor­rupt. A mer­i­to­cratic bu­reau­cracy has not emerged. Even as trust in gov­ern­ment in­sti­tu­tions has eroded, a cul­ture of de­pen­dency has taken hold.

The Greeks, it can be ar­gued, have not earned the right to be saved. And yet a Greek exit from the euro is not the best op­tion for ei­ther Greece or for the Euro­pean Union. Whether or not the Greeks are de­serv­ing of as­sis­tance, it is in Europe’s in­ter­est to help them.

The OECD, the Euro­pean Com­mis­sion, the In­ter­na­tional Mon­e­tary Fund, and the World Bank have em­pha­sised, in re­port af­ter re­port, the fun­da­men­tal in­abil­ity of Greece’s econ­omy to pro­duce long-term sus­tain­able growth. The coun­try’s ed­u­ca­tion sys­tem is sub-par and un­der­funded. Its in­vest­ments in re­search and devel­op­ment are in­ad­e­quate. Its ex­port sec­tor is small. Pro­duc­tiv­ity growth has been slow.

Greece’s heavy reg­u­la­tory bur­den, well de­scribed by the World Bank’s in­di­ca­tors on the ease of do­ing busi­ness, rep­re­sents a sig­nif­i­cant en­try bar­rier in many sec­tors, ef­fec­tively closing off en­tire in­dus­tries and oc­cu­pa­tions to com­pe­ti­tion. As a re­sult, Greece’s econ­omy strug­gles to re­al­lo­cate re­sources, in­clud­ing work­ers, given the rigid­ity of the labour mar­ket.

Af­ter Greece was al­lowed to en­ter the eu­ro­zone, in­ter­e­strate con­ver­gence, com­bined with in­flated prop­erty prices, fu­elled an in­crease in house­hold debt and caused the con­struc­tion sec­tor to over­heat, plac­ing the econ­omy on an un­sus­tain­able path. In the years be­fore the be­gin­ning of the fi­nan­cial cri­sis, cur­rent-ac­count deficits and bub­bly as­set prices pushed an­nual GDP growth up to 4.3%. Mean­while, public spend­ing rose to Swedish lev­els, while tax rev­enues re­mained Mediter­ranean.

In the eight years that I served on the EU’s Eco­nomic and Fi­nan­cial Af­fairs Coun­cil, I worked along­side seven Greek min­is­ters, ev­ery one of whom at some point ad­mit­ted that the coun­try’s deficit num­bers had to be re­vised up­ward. Each time, the min­is­ter in­sisted that it would never hap­pen again. But it did. In­deed, the pre-cri­sis deficit for 2008 was even­tu­ally re­vised to 9.9% of GDP – more than 5% higher than the fig­ure orig­i­nally pre­sented to the Coun­cil.

And yet, as bad as Greece’s econ­omy and po­lit­i­cal cul­ture may be, the con­se­quences of the coun­try’s exit from the euro are sim­ply too dire to con­sider. In the end, such an out­come would be the re­sult of a po­lit­i­cal de­ci­sion, and the Euro­pean val­ues at stake in that de­ci­sion trump any eco­nomic considerations.

For starters, a Greek exit from the euro would be a dev­as­tat­ing blow to Greece. With­out the sup­port of the Euro­pean Cen­tral Bank, the coun­try’s bank­ing sys­tem would be shut off from in­ter­na­tional mar­kets. The over­all use of the euro-sys­tem liq­uid­ity as­sis­tance to Greece came close to EUR 90 bln in early 2015. The gov­ern­ment would have to close the banks for a week or two, print emer­gency cur­rency, strictly limit house­holds’ ac­cess to their de­posits, and in­tro­duce cap­i­tal con­trols. When the mar­ket opened again, the new drachma would de­pre­ci­ate by 30-40% be­fore find­ing an equi­lib­rium.

To make mat­ters worse, the eco­nomic cri­sis could lead to a po­lit­i­cal melt­down, mak­ing it im­pos­si­ble to en­act the struc­tural re­forms that Greece des­per­ately needs. In­deed, one of the main causes of the coun­try’s deep eco­nomic prob­lems is its dys­func­tional po­lit­i­cal sys­tem. The pe­riod of fis­cal re­struc­tur­ing – dur­ing which the deficit was cut from 9.9% of GDP in 2008 to 8.9% in 2012 – al­ready sparked con­sid­er­able civil un­rest. A deeper eco­nomic cri­sis could spark a sharp rise in so­cial and po­lit­i­cal in­sta­bil­ity. Eject­ing such a pre­car­i­ous democ­racy from the eu­ro­zone would be deeply ir­re­spon­si­ble.

Europe also needs to con­sider the geopo­lit­i­cal en­vi­ron­ment. In­creased ten­sion caused by the con­flict in Ukraine risks desta­bil­is­ing other parts of the con­ti­nent. Ex­pelling Greece into such an un­sta­ble in­ter­na­tional en­vi­ron­ment would leave the re­gion more vul­ner­a­ble to those – par­tic­u­larly Rus­sia’s cur­rent lead­ers – who be­lieve they would ben­e­fit from a weaker, less uni­fied Europe.

There are more im­por­tant ques­tions raised by the cri­sis in Greece than whether the coun­try de­serves to be res­cued by Euro­pean tax­pay­ers. At stake are fun­da­men­tal val­ues and strate­gic considerations that are cen­tral to the Euro­pean project. Europe is sim­ply more Euro­pean with a sta­ble part­ner in Athens.

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