Those reading the remarks of government and institutional officials on the recent deal between Greece and it creditors to release an additional tranche of bailout money might be forgiven for a sense of deja vu . The process of Greek government officials and institutional bureaucrats sitting down, and hammering out a deal demanding further cutbacks and reforms of the Greek state that does little to solve the long-term debt and growth problem is agreed to. A “breakthrough” is then declared that is everything but, and the whole thing plays out to the same dead end it has for the past eight years. Despite the 2015 election of a government ostensibly pledged to reverse austerity measures, and the country’s approach to the brink of default during the summer of that same year, very little in the deal inked on May, 25, 2016, works to break this pattern. The fact that the International Monetary Fund has signaled that a large write-down of Greek debt (they suggest up to a 50% reduction on the face value) is necessary to begin the process of economic recovery should make clear that the reigning logic is not the IMF’s but rather that of Greece’s European institutional lenders. The best that can be said of this new deal is that it gives the Greek government some breathing space to implement reforms, and that it does include language on debt relief, albeit over a timeframe of several years.
Greece’s creditor nations, to be fair, are stuck between an institutional commitment to the European Union and a set of increasingly wary voting publics that resent ongoing monetary commitments to debtor nations. It may be that the only way to make bailouts politically saleable, and thereby keep the EU together, is to attach tough public spending conditions to the monetary aid. This is particularly the case now with the threat of British exit from the EU looming, and a variety of anti-EU nationalist parties gaining traction, in part conditioned on a sense fiscal impropriety and lack of democratic accountability that has come to surround the European project.
In part, this public anger is understandable. It is true that, after joining the Eurozone, Greece behaved in an irresponsible manner with its public finances. It overspent on pensions, financed a military build-up to ‘talk tough’ to Turkey and Macedonia and turned a blind eye to rampant tax evasion, all this while hiring large multinational firms to perform accounting tricks that hid the extent of its debt problems and enabled outright criminal behaviour. Put bluntly, Greece never met the Euro convergence criteria and should not have been let into the Eurozone when it was. However, if the Greeks can be blamed in part for pursuing Euro membership, and fudging their financials in order to do so, it is equally true that EU institutions had powerful political motivations to pursue this integration and did not ask too many hard questions when they should have. Of course, this drive to integration despite the consequences has only made the Northern European public more resentful of both the EU and Greek sides of what can be seen, in retrospect, as a deal motivated by the irrational optimism of the moment it was struck, which was almost bound to blow up sooner or later.
At the same time, economics is not a morality play, and as much as it might play well to tell a tale of lazy Greeks living off the avails of hard-working Germans (or Finns, or Dutch), it does little to actually solve the problem. Some of the reforms that Greece has been forced to undertake have been sensible enough (opening up competition in bakeries, for instance) but many have simply been reckless cuts and tax hikes where a fully thought-through reform approach, taking years to do right, would be necessary. Those stating that Greece must simply try harder often point to the economic rebound that Ireland was able to pull off, after implementing its own EU-mandated austerity program as an example of the success Greece could have if it were to fully adopt a reform agenda.
However, some commentators have pointed out that the countries’ situations are less comparable than they initially appear. Ireland had a much more open, liberal economic framework prior to the crash and its acute problems were in part due to a rapid decline in an overheated real estate market. By contrast, Greece’s economy was and remains famously cartelized and dominated by oligopolies. Furthermore, the austerity programs themselves differed too, with Greece’s being more weighted towards tax hikes on things such as electricity consumption, which undercut potential export gains from lowered labour costs. If nothing else, this gun-to-the-head approach illustrates the danger of doing too much too quickly in policy terms. The new deal, by providing day-to-day operational funds for Greece through until 2018 does give some hope that future reforms can proceed in a systematic and thoughtful, rather than haphazard, manner.
To get its economy moving again, Greece does need debt relief, but it also needs opportunities to sell its products abroad, and reforms to increase economic dynamism and break up existing uncompetitive sectors. Policies to increase consumer spending power in the healthy Eurozone economies would also help to increase product exports and service sales for their worse-off neighbours like Greece. Recently announced measures by the European Central Bank to lower interest rates and stimulate bank lending may prove positive in this regard. However, the political ill will generated by the bailouts is likely to prove a stumbling block for this sort of approach, at least in the near term.
The current course of action is an increasingly risky one, with rapidly increasing numbers of Greeks judging the Euro membership as harmful to their nation’s interests and the government looking to Russia for economic support. The European Union is under stress from a variety of factors at the moment and it is understandable if they wish that the Greek crisis would just go away. It is also true that, if European institutions were perceived as giving leeway to Greece, this could create a demand for similar measures in larger, similarly troubled economies like Spain and Italy. Adopted on a large scale, such measures could indeed become genuinely unaffordable, would create significant moral hazard and could have severe political consequences in both creditor and debtor nations. For this reason, a sufficient resolution to Greece’s problems should be considered as part of a broader package of measures to deal with underperforming economies in a systematic, rather than ad-hoc basis. Clear rules, consistently applied, must be developed for EU nations seeking economic aid from other members, along with best practices in reform programs along the lines of the OECD’s “toolkits” in competition policy to ensure that future austerity looks more like Ireland and less like Greece.
At some point, soon, EU leaders will need to decide between the route of continuing to put off the big questions of the Union’s future and the one which gets to the root of the problem and creates the conditions for shared prosperity in all of their nations alike. This new Greek agreement is not that deal, but it does provide an opportunity for it to be crafted. Policymakers on both sides should, with the benefit of hindsight, learn from the mistakes of the recent past and be willing to work together to accomplish this goal.
Image Courtesy of IMF, Flikr (Licensed under CC BY-NC-ND 2.0)
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