Those of us who wish that the euro be brought to an end before too many people get hurt are likely to be disappointed, because European politicians refuse to admit defeat.
Greece now stands on the brink of a sovereign default. Over the last few months, the slump in the Greek economy has been much deeper than anticipated, and, as a result, the Greek government is now in urgent need of roughly $20 billion to cover its immediate financing needs, on top of the rescue package of approximately $170 billion conferred in October of last year.
The government of Lucas Papademos is busy negotiating an orderly default with Greece’s main “troika” of lenders — the IMF, the European Commission, and the European Central Bank — as well as its private creditors. The October agreement counted on the writing off of some $130 billion worth of Greek debt held by foreign lenders, an amount equal to approximately 70 percent of the country’s total debt burden.
In Athens, the weekend was marked by hectic, yet inconclusive, negotiations over austerity measures that are a prerequisite for any further aid to Greece. Private creditors, European leaders, and the IMF insist that these measures are meaningful only if they are complemented by a thorough determination on the part of Greek politicians to bring public finances under control. This means bringing the debt-to-GDP ratio down to 120 percent by 2020 — a level that is still extremely high.
But that reduction is not going to occur unless the most optimistic of scenarios materializes and the Greek economy rebounds. So far, there have been no signs of that occurring. In 2012, the Greek economy is expected to contract by 3.7 percent, after a 6 percent fall in output last year. Unemployment is getting dangerously close to 20 percent, with almost one half of all young Greeks out of work.
The country is paralyzed by intermittent strikes and popular discontent with the technocratic Mr. Papademos, formerly a European Central Bank official and Kennedy School professor, who says that his government’s priority is to keep Greece in the euro zone. Even the head of the Greek Orthodox Church recently lambasted the government for succumbing to “foreigners’ blackmail and fatal recipes.”
Even if Mr. Papademos succeeds in cutting entitlements and improving Greece’s horrific tax-collection practices — the government loses around 15 billion euros annually to tax fraud — it is not clear where the economic growth needed to reduce Greece’s debt burden is going to come from. Some put their hopes in a range of structural reforms, which Greece has been very slow to implement, and which have been met with fierce resistance from labor unions.
The ugly truth is that Greece has a distinctly inhospitable business environment. It ranks 100th in the World Bank’s “Doing Business” report, below Kyrgyzstan, Yemen, and Zambia. Its protection of investors is worse than that of Liberia, Mauritania, and Togo. According to Transparency International, the country suffers from higher corruption levels than Brazil or China — or Macedonia, Greece’s very poor immediate neighbor.
Greece’s problems are not amenable to any easy solutions — and certainly not to solutions imposed by unelected technocrats or foreign advisers. The vast array of institutional reforms that Greece needs to get its economy on track can be effective only if they are seen as legitimate by a critical mass of the population. Mr. Papademos, catering primarily to his European counterparts and not to the Greek electorate, has only a very slim chance of creating and maintaining a strong constituency in support of the necessary reforms.
Mae West was fond of saying that “it takes two to get one into trouble.” However flawed Greece’s economy and political system might be, it would ill-advised to hand it sole blame for the present crisis. The crisis is a consequence of the utopian overreach of those who believed that European countries were sufficiently similar to sustain a currency union. While that decision was clearly a tragic mistake, it is not clear how it can be undone, especially given the strong political commitment of European leaders to the common currency. While there are ways of letting countries exit the euro zone in an orderly fashion, it appears that European political leaders would rather watch Greece implode than allow it to depart from the straitjacket of the euro in an amicable way.
— Dalibor Rohac is the deputy director of economic studies at the Legatum Institute in London.