Why Europe needs to save Greece
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.