, Volume 71, Number 2

Vicky Pryce is Chief Economic Adviser at the Centre for Economics and Business Research (CEBR) and author of Greekonomics

The EU bears some responsibility for Greece’s liquidity crisis

Illustration: Belle Mellor

Who is to blame for the renewed Greek crisis within the eurozone? Of course the Greeks have a lot to answer for. It is a nation that has existed in its modern form only since the First World War, a country that was still under Ottoman rule less than 200 years ago. It had a lot of catching up to do when it re-entered what was a ‘modern’ Europe. 

After the Second World War, its economy made such rapid progress that it was able to join the European Economic Community in 1981 and the euro in 2001. But it had failed to modernize many of its institutions. Its people have retained a dislike of authority, are resentful and distrustful of a bloated public sector and of a byzantine bureaucracy that was described by the 

Organization for Economic Co-operation and Development is one of the most dysfunctional in the developed world. Tax avoidance has been rife. Clientelism and corruption prevail, constraining competition and productivity. 

But is that sufficient to condemn Greece? It is not the only country facing issues of corruption or not paying enough tax or not to have instituted serious structural reforms. Italy’s record, for example, is hardly brilliant. True, after two bailouts of €240 billion in 2010 and 2012, Greece’s debt to gross domestic product ratio has risen to an unsustainable 175 per cent. But Ireland and Portugal have also seen their debt to GDP ratios going up to 120 per cent and 130 per cent respectively and Italy’s is at 137 per cent and rising as the economy struggles to get back to a sustainable growth path. 

Greece should probably not have joined the euro when it did. The lack of a mechanism to transfer money from the rich to the poor countries meant that it would always struggle in a crisis. The eurozone never was an optimal currency area and is only now building the institutions it needs to react early enough to avoid crises in the future.

Where do we go from here? We can accept that mistakes were made and that the austerity medicine dished out to the Greeks by the Troika of the International Monetary Fund, the European Central Bank and the European Commission (now renamed ‘the group’ at the insistence of the Greeks) was excessive. In the case of Greece it has meant a 25 per cent decline in GDP since the crisis started, 26 per cent unemployment, 54 per cent youth unemployment and an exodus of young Greeks to other parts of Europe in the search of jobs and dignity. 

Contrary to popular belief the Greeks were not living beyond their means. At the beginning of the crisis, household borrowing as a percentage of disposable income was among the lowest in Europe, as was corporate borrowing as a proportion of GDP. The banks got in trouble not for over-lending to the private sector as in Ireland and Spain but because of their holdings of Greek sovereign bonds which were dropping in value when the markets discovered that despite the single currency not all countries in the eurozone were equal risks. 

Most of the funds provided under the two bailouts went to shore up the banking system and compensate private holders of Greek debt for the ‘haircut’ they had to endure. Very little, no more than 10 per cent of the second bailout, went directly to the Greek state for the benefit of businesses or individuals. 

Despite wages being slashed by 35 per cent, none of this pain has done much to improve Greece’s underlying lack of competitiveness. 

The Troika-imposed cuts in public spending and tax increases at least resulted in a reduction of Greece’s deficit from 15 per cent of GDP in 2009 to only 2 per cent last year. By the summer of 2014 Greece was recovering and heading for growth of just under 1 per cent for the year as a whole and a small primary budget surplus, before interest payments. Tourism was booming and there were the first signs of an improving employment situation. The country was able to test the markets for the first time in years and borrow at less than 5 per cent on three- and five-year bonds. 

It is hard to think of any other country that would have withstood such a severe and prolonged decline in GDP without a revolution. There had been protests, some of them violent, but they involved relatively few people. The vast majority of the middle classes knew full well that Greece had to change. 

The then prime minister, New Democracy’s Antonis Samaras, hoped to get agreement to exit the bailout early by the year’s end, after Ireland and Portugal had done the same in the months before. But his 2015 budget was rejected by the eurozone finance ministers who seemed to want extra tightening of some €2 billion before disbursing the remaining bailout funds. 

For many Greeks, this was the last straw. As austerity continued year after year, a wave of protest votes resulted in the radical left-wing party Syriza, led by Alex Tsipras, coming first in the May 2014 European elections. 

After Samaras was sent home to redo his budget, a snap general election followed which brought Syriza to government,

Not all those who voted for Syriza app-roved of the party’s pre-election package of promises to ditch austerity, re-negotiate the bailout, raise the minimum wage and create thousands of jobs. Many were disaffected New Democracy (centre right) and Pasok (centre left) voters, most of them not expecting many of the promises to be met but willing to give the party a chance. 

In the post-election euphoria that followed, support for Syriza rose further. But the realities are now hitting hard. With little negotiating experience, the Greek ministerial team had to eat humble pie and go back on many pre-election promises. 

Concerns are rising about the liquidity crisis hitting Greece and on whether Tsipras will have enough hold over his party and his coalition partners to stay the course and avoid bankruptcy. 

An extension of four months has been given for the Greeks to come up with a credible economic reform plan that will allow them to access much-needed funds to repay ECB and IMF debt. But the government is running out of money. While negotiations continue, it is being forced to raid pension and social security funds to pay wages and pensions, though it cannot pay its contractors. Vital health and other services are starved of cash. Greece is once more being shut out of the international capital markets. There is renewed talk of ‘Grexit’ which nobody wants – not only because of what it would mean for the survival of the eurozone but also for the message it would send to the outside world as the EU faces crises with Russia and in the Middle East. 

The Greeks are talking of a referendum and maybe new elections, possibly later this year. Amid this political and economic mess, one question has to be asked: How short-sighted were the EU politicians who sent Samaras home empty-handed back in December 2014? 

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