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Living in a Parallel Universe
Ignoring reality, European elites express optimism about Greece’s fiscal future.

Jean-Claude Juncker, chair of the Eurozone finance ministers

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The crisis raging in the Eurozone reminds one of an old Soviet-era joke: “The future is known, it’s the past that is always changing.” To European leaders in 2012, what is “known” is that Greece is on the path toward fiscal consolidation and eventual economic recovery — despite the missed fiscal targets, rising public discontent, and the need for ever more bailouts. The disconnect between fact and official fiction in present-day Europe is jarring.

European elites look straight past the reality looming before them. After the Greek parliament passed a 2013 budget that promises to keep the deficit under 5.2 percent of GDP next year, there has been no shortage of praise for Antonis Samaras and his government. “Words have been backed by deeds,” says EU commissioner Olli Rehn. Luxembourg’s prime minister, Jean-Claude Juncker, who chairs the group of Eurozone finance ministers, concurs: “I am very happy with the performance the Greek government has undertaken.” Even the traditionally cautious Germans appear satisfied, as Greece has made “far-reaching decisions that go in the right direction,” according to German finance minister Wolfgang Schäuble.

In response to the news from Athens, the troika seems to have agreed to give the Greeks until 2016 to bring the deficit below 2 percent of GDP. And, if we are to believe Mr. Juncker, the expectation is that only in 2022 will the country have reduced its debt to 120 percent of GDP.

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The payment of the next tranche of aid, worth €32.6 billion, will be discussed on November 20, in an event that clashes with the upbeat atmosphere following the adoption of the Greek budget. The exact reasons for optimism are unclear. After all, a successful fiscal consolidation requires elements that are missing from present-day Greece.

First and foremost, to get public finance under control, one needs economic growth. The Greek economy has been in a free fall since 2009. Next year, it is predicted, the GDP will contract by 4.5 percent. Unemployment is at a historically unprecedented 25.4 percent, with more than 58 percent of young people unemployed. Building a reserve army of unemployed youth does not bode well for the country’s future.

What we see in Greece cannot conceivably be a successful fiscal-consolidation program. Throughout the ongoing “consolidation,” Greek debt-to-GDP ratio has been growing and will reach 179 percent next year — in an optimistic scenario. The underlying reason why what we see in Greece is not a real fiscal adjustment is the lack of credibility.

The issue is not so much that Samaras’s party has been complicit in the worst excesses of the early 2000s, which brought Greece to its current situation. What matters more is that no one, save for EU leaders, seems to expect the Greeks to carry out the promises they have made — not even the Greeks themselves. After all, Samaras, referring to the cuts made in the 2013 budget, said that those “sacrifices will be the last.”

Declaring the 2013 budget to be the last genuinely austere budget does not square well with reducing the deficit further during the coming decade — especially with economic growth in sight. Clearly, Mr. Samaras’s hands are tied by his political competitors. Syriza, the extreme left-wing party, which rejects austerity and bailouts, is now the most popular political force in the country.

History is full of examples of countries where reforms imposed from the outside were reversed or neutralized by interest groups. When Yegor Gaidar first outlined his shock-therapy program in the early 1990s, it did not look very different from similar reform packages adopted in Poland or Czechoslovakia. However, unlike populations in the more successful transitional economies, Russians never bought into the radical reform agenda. As a result, the reforms did not stick and were later reversed

While praise should be given to the Greeks for some of their bold measures, which include privatization and increases in pension age, it is unclear that the adopted reforms are particularly “sticky,” when we consider the almost permanent protests in the country, which often border on civil unrest.

European integration, and the euro in particular, have become a cult that prevents otherwise reasonable people from looking for pragmatic solutions to the fiscal crisis in Greece. Each additional day that the European leaders and the troika spend in their parallel universe — one in which the Greeks are successfully consolidating their public finances and reforming their economy — compounds the social and economic costs of the catastrophe that is developing in Greece. Unfortunately, it is quite possible we haven’t seen anything yet.

— Dalibor Rohac is an economist at the Legatum Institute in London. He tweets at @daliborrohac.



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