Greek Crisis: Is Amateur Hour Over Yet?
With the crisis in Greece at a true tipping point, the question becomes, can that nation’s economy be pulled back from the abyss while putting to rest doubts about the viability of the euro zone as a monetary union? Up until this point, the track records of both sides of the issue, whose negotiations have been chronicled extensively in the financial press, do not fill one with confidence.
From the Greek side, while efforts have been made to undertake economic adjustment, precipitating a depression in the process, the record on much-needed structural reforms has been checkered, to say the least. The current government of political amateurs has gone so far as to reverse important reform measures. In addition, the leadership was inflexible in its negotiating tactics until its bluff was called. Then, in a seeming state of panic, it called for a referendum to decide whether to accept the deal offered by the European Union.
The bureaucrats and leaders of the European Union have not covered themselves in glory either. Too often the EU leadership has been reactive and dawdling rather than proactive. Indeed, there have been almost as many special finance minister meetings and leadership summits as Elvis sightings. The terms offered to Greece for further financial assistance are unrealistic in the sense that Greece will never be able to repay its official creditors in full. EU leaders appear unwilling to confront the voters with the fact that taxpayers will have to foot the bill for a crisis that could have been resolved much earlier and most likely at lower cost. Despite the IMF’s protestations to the contrary, Greece’s external debt was never sustainable, particularly given its persistent and rapid decline in GDP.
Attention is now focused on the next chapter of this long and exhausting saga. For Greece, whether it stays in the euro zone or not—or even the EU, for that matter—the country must institute serious and comprehensive structural reforms if it is to achieve sustainable growth and raise the standard of living for its battered citizens. Further reduction in the size of the public sector will be necessary, along with major reform of the pension system, including raising the retirement age. A modern and effective tax collection system must be put in place that includes educating the populace about their duty to pay in. The era of tax evasion as a national sport is long past. From the perspective of many economists, Greece would probably fare better remaining in the euro zone because its economy is relatively closed and therefore would not see the benefits usually associated with a large devaluation of the currency.
Hopefully, as the Greek government reengages with its EU counterparts, IMF chief Christine Lagarde’s wish for adults to show up to the meeting will be realized. Both sides need to be more flexible and also work vigorously to rebuild trust, but that is a tall order. It will be hard for negotiations to progress unless some formula is found to reduce Greece’s debt stock—a difficult pill to swallow for creditor governments as well as the European Central Bank.
In addition to dealing with Greece directly, the EU needs to take action to strengthen confidence in the euro zone amid questions about possible damage if Greece were to abandon use of the euro. In the latter part of June, the president of the European Commission, Jean-Claude Juncker, released a report entitled “Completing Europe’s Economic and Monetary Union.” Although the document has received little attention, its importance should not be underestimated.
The report calls for movement toward fiscal and financial union. For those who have closely followed the euro zone’s progress since its inception, this call to action is nothing new. What is remarkable about this policy agenda is that it is cast in the context of democratic accountability, legitimacy, and institutional strengthening. This could be interpreted as a sign that European leaders realize that extreme political parties are gaining traction, pressuring them to step up their game if they hope to avoid seeing their dream of a more perfect European Union come under heavy assault.