European Movement UK

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If one looks at the economics, Greece is doomed. Odds are stacked against it and, with the IMF-ECB-EC Troika visiting Athens this week, economists across the world are speculating when (rather than if) it will leave the Eurozone.

Its economy is on the verge of collapse. It is not just the massive debts accumulated after decades of economic mismanagement. Greece is undertaking the most drastic programme of fiscal consolidation out of all the countries currently implementing an IMF-ECB-EC programme, according to a research paper by the Central Bank of Ireland[1]. The dramatic and rapid cut in public sector spending has removed government investment and liquidity from the economy and has led to a collapse of GDP over the last 4 years, by about a quarter. Unemployment has risen to over 20% and the salaries and pensions of those that have work have been slashed by as much as 30% in some cases. That fact, coupled with tax rises that target disproportionally the middle and lower incomes (horizontal property and consumer taxes for example) has led to a severe drop in the purchasing power of the average Greek, something catastrophic in a country that depends so much on domestic demand. Consequently tax receipts have fallen (not counting the continuing tax evasion), making it hard for the country to raise any income to pay off its debts.

So, massive debts, high unemployment, no growth. Whichever way one does the maths the figures just don’t add up. Under current circumstances it is very hard for Greece to survive in the eurozone. All seems to be lost.

But there is cause for optimism, thanks to the political will across the EU to keep Greece in the Eurozone. A lot of political and financial capital has been invested to bail Greece out and keep the country from a messy default. The reasons might not be entirely altruistic but the result is all the same; no rational person in Brussels, Berlin, Paris, even London, would like to see Greece crash out of the Eurozone. European political elites, especially those in government in Germany, are risk-averse. There are far too many unknowns and nobody in their right mind wants to take the risk. A Greek exit will not draw the line under the crisis; it will open Pandora’s Box, unleash speculation and increase the pressure on sovereign debt and the European banking sector.

Even those that do discuss openly a Greek exit do so to keep the pressure on the Greek government.

This reluctance to let Greece default and crush out of the single currency is based to a large extent on the fact that it will be European tax payers that will have to foot the bill. With the private sector having already accepted a big ‘hair cut’, it is the ECB and member states that hold a lot of Greece’s debt. That debt will actually generate a handsome return in full maturity so the EU has a vested interest to ensure that Greece is in a position to pay back its debts.

Which is why the IMF-inspired programme that Greece has been asked to implement must be changed. The current one focuses too much on short-term austerity and debt repayment and is making it harder, not easier, for Greece to escape its perilous predicament. The pace and content of the measures must change. Debt reduction must be undertaken with a more medium term perspective, the more time Greece is given the better the chances of reducing its debt burden. The same applies to interest paid for the loans that form part of the bail-out packages. It is fair that a premium is paid to those institutional and state creditors that took the risk to lend to Greece. But the terms must be governed by the spirit of solidarity that underpins the founding principles of the EU rather than the purely profit-making principles of the market.

There is another advantage in relaxing the pace and nature of the programme. An exhausted by austerity population is more reactionary and less likely to support the root and branch reform the Greek economy needs. That makes the process longer, politicians’ resolve weaker and the chances of success smaller. If the social fibre of a country is raptured, the possibility of reforming that country is greatly reduced.

So, reform should take priority. For Greece to return to growth it must regain competitiveness and for that to happen its whole economy must undertake radical restructuring. Public administration must, in some cases, be disassembled and put together again after its size is reduced and its services focused on offering effective and efficient public value. Vested interests must be confronted and the economy must be liberalised, opening it to internal as much as external competition. There are far too many “closed shops” that stop young Greeks from getting a step up the professional ladder. Last but certainly not least the tax system must become transparent, efficient and above all fair. Recent research has found that just the self-employed (doctors, lawyers, engineers, accountants) evaded 28 billion euros in taxable income in 2009 alone. That was equal to one third of Greece’s debt, as it stood at that point[2]. Reforming the tax system is the real battle and for the government to be successful in going after those that are consistently evading taxes it must have the majority of the population on its side, instead of penalising certain parts of society who carry a disproportionally high tax burden, as the IMF programme demands.

It is practically impossible to implement such in-depth reform while trying to achieve fiscal consolidation (not to mention that at the same time the European economy is contracting and the banking system imploding). It is in the interest of both Greece and its European partners to alter the remedy prescribed. More time must be given for debt reduction, more emphasis must be given to investment and more political capital must be invested in reform. To err is human; to forgive is divine, as Alexander Pope said. Punishing Greece does not help anybody.

 

Petros Fassoulas

Chairman, European Movement UK

www.euromove.org.uk


[1] http://www.centralbank.ie/publications/Documents/Economic%20Letter%20-%20Vol%202012,%20No.%207.pdf

[2] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2109500

 

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