Originally published onFeb 26th, 2012
Let us be honest: Severe austerity measures are not going to work. Cutting budgets is not going to save neither Greece nor Portugal. It might actually do exactly the opposite. This does not mean that austerity and responsible budgetary policies are wrong. Proper fiscal austerity and strategies aimed at creating a well-balanced budget should be part of every country’s agenda (though not necessarily the wayGermany insists). The EU’s insistence on austerity measures for both Greece and Portugal is correct but not in its current form and certainly not right now!
The beginning of…
Greece has not yet defaulted but “saving” it will costs European taxpayers more than 145bn euros if data provided by the IMF, ECB and EU Commission are anything to go by. In October 2011 this figure was at least €15bn lower and it seems unlikely that this will actually be enough to ensure Greece will avoid bankruptcy this year. Since then Greece has seen the Papandreou government fall from grace and the creation of a government of national unity with former ECB vice president Lucas Papademos as new prime minister. The announcement that Greece would raise close to €50bn through privatisation of national companies and assets has so far failed to raise even a tenth of the promised income and austerity measures have devastated the economy.
The Greek population does not perceive the European efforts as benevolent but rather express their frustration, rage or even hatred for Brussels and especially Germany’s chancellor Angela Merkel and her finance minister, Wolfgang Schäuble. Instead of seeing their European partners as saviours, Greeks suspect foul play and evil motivation behind the relentless European drill of increased austerity and pay cuts.
The major issue goes a lot deeper than corruption or a failed bureaucracy. The Greek economy is bloated and ineffective. The EU most likely knew Greece was not fit to join the euro e.g. the manipulation of economic key data to secure its entry into the eurozone was somewhat obvious, but allowed Athens to join nonetheless. The rich and middle-income class have for years wilfully avoided paying taxes. Most major Greek companies cannot compete with their rivals in the EU. It lacks economic competitiveness and a major cash inflow sector – tourism alone is not enough anymore, and products such as olives, rice, fish and cotton can only generate a limited amount of additional state income. Thinking about any major Greek company that competes successfully on the European market is difficult. There is no national air carrier (unlike in France, Germany, Poland, etc.), no major technology companies (though telecommunications company OTE is a major player in South-eastern Europe), no pharmaceutical firms.
The picture is no better when looking at other factors: No Greek university is listed in the top 200 rankings of the TimesHigherEducation or the Shanghai Rankings, compared to 12 in the UK (top 100!; 11 in the Shanghai ranking), Germany’s four (seven) or Sweden’s three (four). Almost half of all young Greeks are unemployed. In the third quarter of 2011, so well into the crisis, the youth unemployment rate stood at a shocking 45%, but even in 2008 was at an EU high of 22,1 per cent, only Spain fared worse with 24,6 per cent!
So, basically Greece has a structural problem that, combined with the current financial problem, makes its survival rather unlikely and in the best case scenario at least extremely costly. The solution cannot be to give Athens money whenever it needs to repay another instalment. Neither can it be to throw good money after bad money. The haircut that was discussed in the past few months again and again – letting Greece default but agreeing with its creditors that it will repay part of its debt – has still not become reality. Maybe it would thus be time to take matters into European hands and, together with the IMF, come up with a different solution? It was a good day when European leaders agreed that Greece needs more than austerity measures and that the EU as a whole has to focus more on stimulating economic growth. This is exactly what needs to be done in Greece. The country is broke and it will remain broke, especially after the heavy series of lay-offs and pension cuts which will bring the economy to a halt very soon, if strikes don’t do it first.
…the solution: investments!
What Greece needs is a modern Marshall-Plan. Instead of covering the problems, the Greek economy needs to be rebuild from scratch. This should allow both Brussels and Athens to take more radical steps to a) ensure a return to economic growth and employment, b) attract foreign investments, c) calm financial markets as this would signal a radical shift towards action instead of re-action, and d) capitalise on Greece’s geographical location and green its economy.
The earlier mentioned factors, such as tourism and demand for certain agricultural produce would be supplemented by other income sources. Utilising wind and solar power would allow Greece to become a major energy exporter. Higher employment rates will ensure more consumption to revive domestic markets, also giving young people a future in the country. This in turn will prevent the dangerous brain-drain that would leave the country without brilliant young minds that can contribute to make the economy more competitive.
This will not be cheap, let’s be honest about it. However, it might pay off a lot faster than keeping Greece barely alive at the moment. Considering the fact that the EU is determined to run the world’s most eco-friendly economy, it would make sense to take the necessary steps now. Helping Greece now will eventually be helping the EU achieve its climate goals.