A Greek Lesson for the EU

Posted on February 24, 2010

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Finally, after many years of constructing Potemkin villages, the facade seems to have fallen in. Not only have irresponsible banks and individuals had to face up to the consequences of their behaviour over the past decade, but also irresponsible sovereign countries are now being forced to do the same. Greece has long had structural problems in its economic, political and social make-up, as illustrated in the 2008 riots in the streets of Athens. Its public finances have turned out to be in a far worse state than was at first feared – the budget deficit stands at 13% of GDP and gross government debt at 108% of GDP in a structurally un-dynamic economy whose government has at last admitted engaging in deplorable accounting practices to cover up its problems.

The Greek government went on an irresponsible spending spree during the boom years following its admission to the euro-zone (which provided a comfortable shield from economic pressures to reform) and must now face the music. It has debts exceeding the total value of its economy – and any household knows that such a state of affairs is untenable. The only effective solution for Greece, therefore, is to cut back on its spending, as would any family which found itself in a like situation. The problem, naturally enough, is that voters do not take kindly to such measures, and they have not been at all slow to respond with strikes and protests. Nonetheless, they amount to essential surgery which the responsible Greek citizens of Greece must accept. Much of the blame can, indeed, be placed on the government, but the population, having shared in the proceeds of economic growth during the fat years of expansion, must now embrace lean years of austerity. In a country where the average citizen retires at age 58 and blatant tax evasion is the norm, the proposed measures, viewed from outside the country, might even be considered dangerously modest.

Greece’s public financial crisis and its EMU-membership, moreover, raise the issue of interstate responsibilities. What responsibilities have other nations towards Greece at this juncture? In a setting of less complexity than today, the short answer would surely be ‘none’: since the problems have been largely self-inflicted, it should be for the government of Greece, as the highest political authority, to resolve them. The reality is, needless to say, much more complex given the mutual dependencies of a globalised financial world which are much more acute in a currency union such as that of the euro-zone. A bankrupt Greece would, no one seriously doubts, provoke collateral damage elsewhere in Europe, but a bail-out will certainly establish a precedent that is far from discouraging of fiscally lax behaviour.

More than anything else, this episode highlights the consequences of irresponsible political and fiscal behaviour and ought to lead to close examination of structural and psychological problems inherent in the euro-zone and in the EU at large. Basing economic policies and institutions (such as EMU) on political wishful thinking instead of sound economics can never be a good idea.

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