New solution for Greece could herald start of better eurozone
The last several weeks brought some hope to efforts aimed at bringing the European boat into safer waters.
On June 17, the Greek people voted for a second time in two months, following an inconclusive election on May 6 that led to a hung parliament. In the June elections, the picture was different, allowing the formation of a coalition government between the Conservatives (New Democracy), the Socialists (PASOK) and the Democratic Left (DIMAR). Together, these parties control 179 seats out of 300 in the Greek parliament. For the first time in decades, a coalition of Greek political parties are willing to work together and find common ground to put finances in order, push necessary re- forms and proceed with certain privatization projects aimed at restoring confidence and ending the vicious circle in which Greece seems to be trapped since 2010.
At the same time, all political parties in the country recognize the fact that the current set of policies that are being designed and pushed through by Greece’s lenders (the so-called “Troika” comprised of the IMF, the European Central Bank and the European Commission) exacerbate an already difficult situation. The general feeling in Greece is that the crucial issue of growth is not adequately addressed.
The country is now in its fourth year of deep recession, with a cumulative decline of GDP in excess of 20 per cent. There seems to be no respite in the near future, given that the current rate of contraction is at an all-time high of 7 per cent. Not surprisingly, unemployment has skyrocketed from 8 per cent in 2008 to more than 22 per cent in 2011 and rising.
Any further austerity measures that the Greek government may be called to adopt will only worsen the rate of economic contraction and exacerbate social tensions. In the end, policy-makers end up chasing their own tail: cuts lead to recession and then to further cuts.
Therefore the question is how to reduce the deficit in a sustainable manner, without killing the chicken that lays the eggs. In this context, the recent European Council of June 29 made some important decisions that could begin to turn the tide. EU leaders approved a development package of 120 billion euro for the Union in order to kick-start growth.
Furthermore, after long deliberations, it was agreed that any aid given to beleaguered financial institutions should not be added to the national debt of member states (statement reads “to break the vicious circle between banks and sovereigns”). Rescue funds will be channelled directly to the banks in need by a supranational authority to be up and running in the next few months, which shall have the power to exercise strict control over these banks, without the involvement of national states.
At first, this decision could be brushed aside as somewhat technical. However, it is a very important step toward creating a eurozone Financial Authority with concrete powers to regulate, recapitalize and supervise banks in peril. Some say that it is the first move toward a banking union across the eurozone area.
If this mechanism applies to Greek banks, it will have positive repercussions for the economy as a whole, given that Athens is set to receive about 50 billion euros for the recapitalization of its banking sector. It would be a relief on public finances if these funds went directly to the banks and were not added to an already bloated national debt.
Of course, these decisions are only a first step in the process of loosening the austerity grip, particularly in Southern Europe, that is causing asphyxia. More needs to follow.
We could be witnessing the growing pains of an ongoing effort, as the eurozone is struggling to move from a loose association of countries sharing the same currency to a tightly-knit fiscal and monetary union.
If this transformation is successful and beneficial for the people of Europe, the whole process could lead to a political union, comprised of the member states of the eurozone area.