Austerity has failed Greece. What was once an economic ‘fever’ has spread to the lungs, kidneys and brain. Greece is now much sicker than it was at the beginning of the 2010 debt crisis. Time, and concerted economic and political capital, will be not only necessary but also crucial in order to treat the Greek debt crisis, and by extension, Europe.
Keynesian economists predicted that austerity measures, in this case of a ballooning over-proportion, would fail Greece. According to Columbia professor of economics, Joseph Stiglitz, the other debt-ridden countries of Europe find themselves in a similarly unforgiving situation when they collide with the rhetoric and economic policy of Brussels. The Troika (European Central Bank, International Monetary Fund, European Commission), which owns nearly all of the Greek debt, has imposed a strict rule of austerity upon the Mediterranean country in order to avoid a national default that also threatens the economic security and future of the Eurozone currency.
It must be stated, that both the discussion and economics of the Greek debt crisis are not universally generalizable to the global economy. To be clear, the circumstances – and likewise, consequences surrounding the Greek debt crisis are exceptional. The symptoms of the crisis are also well documented.
Today, Greek GDP is 25% lower than pre-2007 levels. Debt to GDP has risen to 180% from 105% in 2007. Government spending, on education, health care, and public services has decreased by $3,700 per capita since 2009, and unemployment remains a staggering 26% of the active labor market. Exports are suffering against a weakened Euro and will continue to suffer without adequate investment from both Athens and Brussels. Some of the steep tax increases, coming as part and parcel of continued EU bailouts, continue to stifle growth in order to keep paying down an unsustainable debt load. Tax increases on Greece’s struggling tourism sector, for example, highlight the problematic nature of the current economic situation pressing Greece.
Failure to address its serious structural problems and massive debt load would not be a prudent solution given the serious structural mismanagement and mis-representation of previous Greek budgetary deficits. With the July 4th agreement, or third memorandum, a new economic path has been lit for Greece. The agreement, which has been described by its detractors as ‘savage and unusually cruel’, represents the country’s best opportunity for a once-in-a lifetime chance to reform and open up the economy. The July 4th Agreement, signed by Syriza Prime Minister Alexis Tsiparas, imposes a series of serious conditions which Greece must meet in order to receive the third Troika bailout. Phasing out VAT sales taxes exemptions on Greek resort islands, increasing the retirement age to 67 by 2022, and re-launching a stalled asset privatization program are all minimum requirements of the Troika bailout.
So what is ahead for Greece?
Developing new productive industries is essential to Greece’s economic future and recovery. Despite the harsh program of austerity, Greece still has massive potential. Reforming the labor market, following the path of recent legislation in Italy and Spain, can increase labor market activation. Confidence can return to the Greek economy if the country removes institutional barriers to competition and growth, thus opening up new investment opportunities. Without a clear and focused investment strategy, however, Greece runs the risk of remaining in its current state of doldrums until at least 2017. Structural unemployment, or those seeking employment for more than 18 consecutive months, will continue to be a serious problem for Greece as it faces one of the worst ‘brain drain’ crises in the world. With this in mind, it is also crucial that Greece continue to make strong and principled commitments to poverty reduction efforts. Likewise, tax evasion, usually a topic verboten in Greek society, must become a much larger part of the economic and political dialogue. Corporations and wealthy individuals are the last holdouts in Greek society still perpetrating tax evasion. Reforming tax codes and penalties should be a continued priority for any government serious about tackling this essential component to re-structuring the Greek economy.
Restructuring Greece’s debt, although not a popular option to the ears of the Troika, should be considered as a reasonable solution to easing the fiscal, economic and political burden on the country. The Troika’s obsession with debt reduction is, in principle, not off the mark, but the fetishistic obsession with it being grossly reduced in the short term simply continues to strangle growth in the economy. As Professor Stieglitz suggests, converting current debt bonds into GDP-linked government bonds may be one way to incentivize debt reduction strategies. If the Greek economy does well, and confidence returns, its creditors will make a percentage off the dividend of the bond. The Greek government could then in turn use a portion of the revenue from these bonds to pay down the debt.
There are, however, a few burning questions that remain to be problematized even as Greece enters the fifth year of its debt crisis. What proportion of bailout funds have remained in Greece and not syphoned off to foreign creditors? When will Greece have access to better borrowing conditions to encourage stimulation?
The narrative around, and discussion on, the Greek financial crisis must make every effort to distance itself from its dogged obsession with a win-lose outcome. Only Europe and Greece can survive, together, with a win-win scenario. Policymakers, politicians, and most importantly, the public must abandon the win-lose mentality or else risk the division of the continent, and the end of the European project.