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Greece Is The Word

June 24th, 2011 Posted in Economics, EU Politics by

How to solve a problem like Greece? Former queen of daytime chat Fern Britton was flummoxed on the BBC’s Question Time on Thursday night. And like David Mitchell, I don’t really know either. However, on the wider issue of the durability and endurance of the European Single Currency – and to evoke that quote widely attributed to Mark Twain – some obituaries are prematurely written. Even as early as the turn of the Millennium, the late Milton Friedman prophesied its demise.

But claims of the Euro’s death have been greatly exaggerated. The current membership may change slightly with the most damaged economies perhaps opting to revert to their former national currencies, or in another scenario we could see the emergence of two monetary unions: a ‘Debtor €’ comprising the Med countries and a ‘Creditor €’ including Germany and other low-inflation states.

Personally, I’ve felt largely ambivalent on Euro membership. The fanatics for and against frequently bore me and the whole debate is couched using hyperbolic language. Nonetheless, I don’t think the Euro per se is intrinsically flawed or irredeemable. In the case of Greece, Europe would have been a lot better off if it had stuck rigidly to the rules set out at Maastricht, thus avoiding premature or inclusive membership.

Greece consistently breached the 3% deficit limit even prior to the current crisis and went unpunished despite the legal duty to comply with convergence criteria. Their unreformed public sector and high and unstable rates of inflation should have raised eyebrows prior to Eurozone accession. It is widely recognised that they were economical with the actualité and massaged the figures in order to meet entry requirements, something acknowledged by the former ECB Chief Economist Otmar Issing:

When I worked for the ECB, I suffered every time countries didn’t meet the criteria. Greece cheated to get in, and it’s difficult to know how we should deal with cheaters…There should have been better monitoring, better scrutiny and more sanctioning. This crisis wasn’t unavoidable.”

As in any other private members club, individuals are obliged to abide by the rules. Accepting EMU rules, devaluation or inflationary monetary policy were no longer avenues the Greeks could go down. They did nothing to lower their public debt but instead went on a spending binge. It does not seem fair or just that taxpayers’ money is being moved from countries who stuck (by and large) to the respective criteria to those who did not.

European leaders should not use the Greek crisis purely as a catalyst for more integration which would only further embitter sceptical national populations but rather to end the slack monitoring of the fundamental rules of the club.

Other Member States should not end up with a hangover for a party they did not attend.

3 Responses to “Greece Is The Word”

  1. Mark Littlewood Says:

    In my own humble opinion, this isn’t attached to the euro as much as some believe.

    It is true that Greece can’t inflate their own currency and thereby subtly rip off the population by a few % a year without them really noticing.

    The high spending, bloated Greek public sector could have pursued this strategy for a good few years yet if they hadn’t joined the euro.

    And – no doubt – Greek politicians would blame capitalism and the money markets for some irritable misundertanding of how their long term plan added up or didn’t.

    The eurozone has been harsher on the idiocy of Greek socialism, than the retentionof their own “sovereign” national currency might have been.

    The solution is to allow – indeed, encourage – Greec to default on its debt. It’s the same as a company entering administration. Creditors will only recover a % of their money. Maybe 70% or so, in this case.

    This will hurt. And badly. The absurd fiction that a loan to a government is 100% secure will be blown to bits. Our own government debt in the UK will probably become even more expensive to service as a consequence.

    It’s the start of the dawning reality that a high spending, inefficient social democratic model of government doesn’t work. At some point, political fantasy meets economic reality. Eventually, the latter wins.

    This could be nasty in the short term, but beneficial in the long term.

    I;m very sorry for the citizens in Greece who will take a monumental hit to their living standards. All sorts of things – health care, education, pensions – will suffer massively as a consequence.

    But, the sad truth is that year on year, the Greeks have voted for fantasy land. For low tax and high spending. For largesse. For a whole ton of benefits on the never never. With some vague hope that no one will ever notice the numbers don’t add up.

    That game is over. And the consequences – of practising social democracy even in the face of basic numeracy pressing against it – are going to be very nasty.

    But we might as well get it over with now. Prolonging the agony won’t obviously lower the overall pain.

  2. Andy Mayer Says:

    I agree with both of you, good piece. My attention has also been drawn to this analysis of why they are where they are.

    and this:

    Less an issue of ‘low tax’ than high taxes and anti-competitive business regulations so extreme that evading them is seen as the only way to get on.

    Exiting the euro would not make Greece a dynamo economy. They need large structural reforms, a more realistic level of public spending equivalent to the taxes they can actually raise, and better neighbourhood relations to promote trade.

    The facility to depreciate the currency would mask those underlying causes in the short-term, much as our Government did in the run up to the 2010 election. I can see why populists would find that appealing, but not fans of long-term prosperity.

  3. Laurence Boyce Says:

    I enjoyed the wisdom of Fern on Afghanistan:

    “I am quite certain that there is a vast and long spectrum of Taliban members, al-Qaeda members, and some of them – probably the majority – are reasonable enough to sit and talk with.”

    Yes of course. The majority of al-Qaeda and the Taliban are perfectly reasonable. Makes you wonder why we went to war in the first place.