EUROPE'S GREEK CRISIS IN TRANSITION - A LIBERAL APPROACH
Abstract
The common currency has been an ambitious and complex experiment for Europe,
especially given the incomplete political and economic state of the Union up to
day. When in 2009 it became apparent that Greece could default on its debt the
Eurozone leadership felt the danger of a domino effect strong enough to
generate acute damage to the rest member states. Although an adjustment program
was agreed, and two more followed for Greece, the situation is still grave. The
systemic danger is no more but the country is yet unable to recover despite the
vast reform agenda it has carried through so far. This paper tries to assess
the cause of the ongoing Greek problem in the context of the EU crisis, the efficiency
of the applied policies and discuss a liberal alternative to put Greece and the
EU back in normality.
Key words: Economy, Crisis, Greece, European Union, Adjustment program
European Liberal Forum - POLICY REPORT (2017)
Introduction
It was spring of 2016, in a café in Brussels, when a group of trainees
from a north European country bullied a Greek girl sitting at the neighbouring
table into paying their bill. The girl, a stagier herself, was hanging out with
friends when she heard the nearby company shouting at her that she should begin
paying back her debts to them right away. In discussions with central European
fellows, the author listened that it was the Eastern Orthodox religion to blame
for the current state of affairs, featured as “fundamentalist”.[1]
From another angle, in March 2017, Eurogroup’s President Jeroen Dijsselbloem outreached the existent state of
criticism denouncing the Greek people for ethical errors, namely alcoholism and
adultery, which he considered the reasons of the crisis.[2]
It is commonly accepted that false collective images reflect
misconception about the subjects, revealing that prejudice and chauvinism are
still apparent in Europe: for a significant minority, Europe consists of hard
working citizens of the North and the incompetent PIGS[3]
of the South. For the rest, Europe has to move on with unity and substantial
policies preventing transfer of power to populists and Eurosceptics who put the
entire European project in jeopardy. Mixing politics and economics with cultural
stereotypes and convictions for an entire region portrays the crisis merely as
the failure of national policies due to overspending, isolated from the
supranational environment, and disregards
that the EU has a lot of working yet to do in the institutional sector.
The Greek sovereign
debt crisis
Greece was not prepared
to join the common currency. Once it did, private foreign capital inflows combined
with low interest rates led to unrealistic income raises and then to an
increase in demand for imports due to the average domestic production. In
addition, public spending dramatically exceeded the actual fiscal capabilities
and especially after 2004, the conservative administrations failed to introduce
reforms and stabilize the economy. Hence, shortly after the 2008 global
financial crisis had erupted it was understood that the game for the country
was coming to an end. The fall of 2009 the Greeks were called to early elections amid
debates about a disaster that was about to appear while earlier that year,
irresponsible borrowing paired again with irresponsible lending with investors willing
to finance Greece’s deficits even at that time.[4]
The situation was so serious that the anti-austerity
platform of the newly elected social-democratic government was sent to junk. For
Prime Minister Papandreou and his cabinet there was either bankruptcy, Grexit and domestic chaos or
international assistance at any cost and the difficult avenue of austerity and
reforms. The first option would have unprecedented consequences
for everyone in the Eurozone, threatening several French and German private
banks who had previously faced losses from the US toxic-derivatives and now
were exposed to the Greek debt (and the debt of the South).
Therefore, it was a political imperative for all
sides to keep Greece in the Eurozone until the situation was under control; for that reason, the Greek
government applied to the “Troika” –a body formed for this purpose by the
European Commission, the International Monetary Fund (IMF) and the European Central
Bank (ECB)- asking for a bail-out: Europe’s tax payers, even those from
countries poorer than Greece, were to fund a private investment fiasco. As Rocholl and Stahmer have
shown, “most of
the money was used to actually transfer risks from private to public
creditors.”[5] Bluntly put, the adjustment program (and the
ones who followed) was a political program designed to eliminate the risk for
the lenders, to safeguard the banking system, to prevent contagion to other
Eurozone countries and last, to keep Greece alive with the Euro.[6]
It was not designed to correct the unique inefficiencies of the Greek case,
helping for example develop a viable model of production and innovation.[7]
The
rescue programs and their impact
The adjustment programs introduced measures for harsh
austerity and reforms, many of which, such as privatizations, improvement of
justice mechanisms, update of industrial legislation and enhancement of public
administration were on a liberal direction. However, the budget balance was not
sought via new investments but with high tax rates (applied to very narrow
bases) and deep cuts, hurting primarily the weak classes. Combined with the
introduction of new, flexible forms of labour, for average
gross salaries as low as €394.00,[8]
the programs resulted in
economic stagnation, unemployment and emigration (brain drain). The special
report on Greece by the European Court of Auditors criticized the Commission’s narrow
scope of the rescue programmes, calling for a more comprehensive and systematic
design adapted to the overall situation of the country.[9]
This is not to say that the list did not include necessary and modernizing terms, indispensable for economic recovery; on
the contrary, many reforms should have been implemented years before the
memoranda from the Greeks alone. The problem though, lies on Troika’s ineptitude
to rejuvenate the economy, which shrank by a quarter the last years; and, as the GDP
collapses, the key debt-to-GDP ratio rises. With the loan of the 3rd adjustment program
(€86 billion euros) the economy received additional debt, dividing the EU and
the IMF about its sustainability.
The Greek
Parliamentary Budget Office (PBO) has alerted that it is necessary to accompany
adjustment with a credible program for sustainable growth (oriented to
production’s restoration) based on resources from the ESM, the ECB and other
European institutions.[10]
However, the two first Memoranda granted Athens €215.9 billion euros from which
only €9,7 billion was oriented to Greece’s fiscal budget or to what is called the
“real” economy.[11]
Consequently, the toxic combination of austerity and lack of growth has rendered
the debt unsustainable, several studies suggest.[12] For the
same reason, the IMF has called for a debt relief.[13]
Now the problem
becomes political again: admitting that the debt is unsustainable would
question the EU leadership’s decision to fund it with public money, insisting on
a program with poor results. The elephant is in the room.
In August 2018, in
less than one year, the 3rd adjustment program will be up and it
seems very unlike that Greece will have access to independent capital markets
for financing. Without a 4th program, the infamous Grexit will be on
the horizon and the agony of the Greek and the European people will be threatened.
Given the IMF’s position about its participation in future programs,[14]
the situation will probably reach
stalemate.
Ownership
of the reform agenda?
Another study[15]
emphasizes the importance of ownership of the reform agenda, noticing that this
is not the case in Greece. Indeed, the political elite has refused to take
responsibility of the measures either with ideological or electoral motives. Every
opposition since 2010 denounced the adjustment programs promising solutions
without pain or tears. But this is not the full story: the one time that it was
proposed by an Administration to invite the Greek people take ownership of
their future, the EU leaders stopped it. In the EU Summit of October
27, 2011, it was agreed a large debt restructuring and a new bailout loan of
172 €billion
for Greece. Upon his return to Athens, Prime Minister Papandreou found a
difficult situation of upheaval and decided to call a national referendum on
the program, forcing the Greek people and the opposition to take sides, make a
courageous choice and end the debate for good. Papandreou’s announcement
though, rose the risk of contagion to Italy, a “too big to fail” economy, infuriating
Angela Merkel and Nicolas Sarkozy who learnt the news at the G20 Summit in
Cannes. They immediately summoned Papandreou to get to them, they had an
intense discussion with him and a few days later he resigned for a coalition
government with a technocrat Premier. The chance for the Greek people to share ownership was killed.[16]
Reforms are not enough
The European management of the Greek
problem means more than rescuing one weak country; it is a crash-test for the Union’s
ability to handle with crises, support member-states and act efficiently as a
single agent. In February 2017, the Director of the European Stability
Mechanism (ESM) Klaus Regling said that Greece needs no additional debt relief;
instead, he added, it has to implement reforms so as to get the next tranche of
the ESM loan soon.[17]
Put differently, for Regling the indebted Greece needs more loans instead of
no-more-loans. But this was not his only contradiction: in November 2, 2017, he
changed his mind, saying that he would consider the option of debt
restructuring albeit only after the end of the current program, in August 2018.[18]
And further, he noted that a growth clause and a development bank are in the
process echoing the proposals of the controversial former Finance Minister of
Greece Yannis Varoufakis,[19]
whose ideas Regling had intensively criticised. Jeroen Dijessenbloem also
adopted Regling’s opinion,[20]
despite his attachment to Wolfgang Schäeuble, former German Finance Minister,
who had ruled out that such an action would violate EU rules.[21]
The IMF is much more clear, constantly
calling for debt relief. For the Fund the debt is unsustainable, despite the
reform efforts because
a debt-reduction strategy that is based on maintaining unprecedentedly
high primary surpluses or output growth rates for extended periods is not
credible, even with full implementation of planned policies.”[22]
PBO has been arguing since 2014 that
some public debt restructuring must take place prior to Greece’s return to the
markets. It would improve both the country's prospects and its credit rating,
resulting in lower interest rates.[23]
In its latest report (November 2017) PBO raised very serious concerns about
Greece’s ability to fulfil its financial obligations projecting that between
2021 and 2026 it has to pay €84,3
billion in interests.[24]
“Without significant debt relief, the country will go bankrupt,”[25]
the report stressed.
That being so, it can be asserted that it is one thing to
accomplish reforms and another thing to sort out the debt issue. When the EU representatives
interconnect those two, insisting that reforms are the answer to the excessive
debt, they let themselves get sidetracked from the actual problem. There is no
room for doubt that reforms are essential but not enough: an inflow of cash for
investments is required and
simultaneously productivity must elevate so as to render Greek products competitive
internationally.[26] At the moment, stagnation and
austerity steadily shrink the economy keeping debt-to-GDP ratio high.[27]
Therefore, it is too risky yet to advertise Greece’s return
to the capital markets, as some EU officials and the Greek government do, politicising
an economic affair. After all, it will take years for Greece to gain its autonomy because
it will remain subject to European surveillance mechanisms even after the
adjustment programs, whenever that may occur.
A
liberal alternative
Greece has received significant support from
its European counterparts and this cannot be neglected. The adjustment programs
have been significant for the country’s operation, for keeping it in the
Eurozone and for pushing a set of radical reforms in limited time.
Nevertheless, the results speak for themselves and the Greek economy remains
fragile. As discussed above, the debt sustainability is debatable and the
economy has fallen short in reconstructing its production base or attract
foreign investments in an environment of uncertainty. The EU, as the leading
force, needs to endorse a more efficient and viable solution that would leave
the crisis behind allowing Greece return to social stability.
From a liberal spectrum, the next steps should be based on a
sound policy context, a functional
policy design and a robust policy delivery. It is not argued another debt cut
here. The lenders would not accept it because it requires parliamentary vote and
hardly someone could justify to his or her constituency how a previously
sustainable debt has become eventually unsustainable; many investors would be
damaged and confidence would evaporate; and, it would be morally wrong. The
Greek people must honour the agreements and return that money to their fellow
European citizens restoring their reputation that has suffered the last 8
years.
Instead, a short term forbearance to
Greece, for a period of 5 years, could be granted, during which all the pending
reforms must be completed. The same time, the economy will have to deliver
budget surpluses (not merely primary ones) which should be invested exclusively
on development and growth, galvanizing progress in all economic sectors. Last,
the EU should actively encourage the installation of industrial units in the
country, founding a competitive basis for production and exports.
Conclusion
The European Union is at the crossroads.
The 2017 Freedom in the World report
poses that “it is no longer possible to
speak with confidence about the
long-term durability of the EU.”[28] Earlier, President
Juncker, of the European Commission, had sent a warning about the future of the
Union via his White Paper,[29]
a working paper of five scenarios released on March 2017. His pessimism was a
clear sign that improvement is necessary and possible. Common strategies for
unity, prosperity and freedom should substitute ineffective choices and a new
liberal deal should work as a political compass. The European nations have come
a long way and they can go farther together.
After so much effort -with gains and
losses- a positive outcome for Greece is feasible but it requires immediate and
decisive response. Resolving this equation, introducing
more the actual spirit of unity and integrity, Greece will recover and
the EU will benefit by entering a new period of liberal consensus, with economic
stability and political effectiveness, ready to work on its integration
ambitions.
[1] A fundamentalist is a radical believer who upholds belief in the
strict, literal interpretation of scripture. Such
extreme examples include a few American Churches and political Islam.
[2] He said: “During the crisis of the euro, the countries of
the North have shown solidarity with the countries affected by the crisis. As a
Social Democrat, I attribute exceptional importance to solidarity. [But] you
also have obligations. You can not spend all the money on drinks and women and
then ask for help.”Mehreen Khan and Paul
McClean, “Dijssenbloem under fire after saying eurozone countries wasted money
on alcohol and women,” Financial Times,
March 21, 2017, https://www.ft.com/content/2498740e-b911-3dbf-942d-ecce511a351e. See also:
Alexander Armbruster, “Frauen und Alkohol,” Frankfurter
Allgemeine, March 23, 2017, http://www.faz.net/aktuell/wirtschaft/wirtschaftspolitik/kommentar-frauen-und-alkohol-14938812.html.
[4] IMF, Country Report No.
09/244, August 2009, https://www.imf.org/external/pubs/ft/scr/2009/cr09244.pdf, 11.
[5] Jörg Rocholl and Axel Stahmer, “Where did the Greek
bailout money go?”, White Paper No. WP–16–02, Berlin: European School of
Management and Technology, 2016.
[6] For more see: Fabio
Colasanti, Financial Assistance to
Greece: Three programmes, Discussion Paper (Brussels: European Policy
Center, 2016).
[7] European Court of
Auditors, “The Commissions intervention in the Greek financial crisis,” Special
Report No. 17 (2017): 8-9.
[8] Parliamentary Budget
Office, Quarterly Report July-September 2017 (November 2017): 10.
[10] Parliamentary Budget
Office, Quarterly Report April-June 2014 (July 2014): 9.
[12] For example, see: Alexander Kritikos and Marian
Hafenstein, Marian, “The Greek Crisis, a Tragedy without Catharsis?”, Vierteljahrshefte zur Wirtschaftsforschung,
Vol. 84 (2015). 195-209, Klaus Schrader, David Benček and Claus-Friedrich
Laaser, “Saving Greece once
again: Have we Reached the Root of the Crisis?”, Vierteljahrshefte zur Wirtschaftsforschung, Vol. 84 (2015): 41-42.
[13] The IMF commented: “Greece’s debt
remains unsustainable. Further discussions are needed to converge on a strategy
based on realistic assumptions and on a broadened scope for debt relief to
restore Greece’s debt sustainability” in Press Release, July 10, 2017.
[14] Ruth
Berschens and Jan Hildebrand, “Sources:
IMF and Schäuble Closer to Deal on Greek Debt Bailout,” Handelsblatt, May 23, 2017, https://global.handelsblatt.com/finance/imf-and-schauble-reach-deal-on-greek-debt-bailout-770888.
[15] Klaus
Schrader, David Benček and Claus-Friedrich Laaser, “Saving Greece once
again: Have we Reached the Root of the Crisis?”, Vierteljahrshefte zur Wirtschaftsforschung 84 (2015): 41-42.
[16] For more about the
referendum see: Peter Spiegel, “How the Euro was saved,” Financial Times, May 11, 2014, http://ig-legacy.ft.com/content/f6f4d6b4-ca2e-11e3-ac05-00144feabdc0#axzz4xMgYkGtF.
[17] Klaus Regling,
“Solidarity with Greece will render its debt sustainable,” Financial Times, February 9, 2017, https://www.ft.com/content/c342c624-eeb0-11e6-ba01-119a44939bb6.
[18] “Need for
Greek debt relief to be assessed in Aug. 2018: Klaus Regling,” New Europe, November 3, 2017, https://www.neweurope.eu/article/need-greek-debt-relief-assessed-aug-2018-klaus-regling/, Michele Kambas, “ESM chief: We'll see in August 2018, if
Greece needs more debt relief,” Reuters,
November 2, 2017, https://www.reuters.com/article/us-eurozone-greece-regling/esm-chief-well-see-in-august-2018-if-greece-needs-more-debt-relief-idUSKBN1D225Q.
[20] Jeroen Dijssenbloem,
“Leave Greek Elections till 2019,” interview by Alexis Papachelas, Kathimerini, October 2, 2017, http://www.ekathimerini.com/222125/article/ekathimerini/comment/leave-greek-elections-till-2019-dijsselbloem-tells-kathimerini.
[21] Birgit Jennen and Patrick Donahue, “Schaeuble
Rules Out Greek Debt Cut as Violation of EU Rules,” Bloomberg, February 8, 2017, https://www.bloomberg.com/news/articles/2017-02-08/schaeuble-rules-out-greek-debt-cut-as-violation-of-eu-rules-iyxc58e4.
[24] Finance Minister Euclid Tsakalotos disputed PBO’s findings, claiming
that the interests are much lower.
[26] Garry Jacobs and Mark Swilling, “The Greek Financial Crisis: Theoretical
Implications,” Cadmus 2, no. 5
(October 2015): 82-89.
[27] European Commission, Autumn 2017 Economic Forecast-Greece, https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/greece/economic-forecast-greece_en.
[28] Arch Puddington and Tyler Roylance, Populists and Autocrats:
The Dual Threat to Global Democracy [Freedom
in the World Report 2017] (Washington: Freedom House, 2017).
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