Lessons from the Greek Debt Crisis
Never before in the last 50 years have European political leaders spent so much energy and time on the solution of a problem that should never have arisen: the Greek debt crisis.
The Greek debt crisis has occurred because of serious shortcomings in economic governance in Greece, with a good deal of co-responsibility by EU institutions.
Greece should never have been allowed to join the economic and monetary union in 2001.
It was not mature for it.
Its political system was marked by serious dys-functioning and an absolute lack of rigour.
Its public debt level and interest payments as share of budget expenditures was already excessively high.
Its competitiveness left much to be desired, as reflected in a sharp increase of unit labour costs since 1995 and a structural current account deficit, reaching almost 8 per cent in 2000.
After joining the euro zone, the government did not make the necessary efforts to repair the initial handicaps.
It failed to engage in many overdue reforms from privatisation to tax reform, fight against tax evasion, pension reform, improvement of its educational system, encouraging R&D , reduction of "defence" spending to fighting "clientelism". like privileges enjoyed by public sector unions and long haul carriers.
As a consequence, its budget situation continued worsening.
Since EMU membership, Greece did not succeed once to respect the three per cent budget deficit limit that constitutes the core rule of EMU. Permanent budget deficits of more than five per cent, reaching 14.7 per cent in 2009, have led to an explosion of public debt. Between 2001 and 2009 public debt doubled from € 150 to 300 billions, a record in European economic history! Because of stagnant economic growth the ratio of public debt to GDP, supposed not to exceed 60 per cent, reached 142 per cent in 2010 and is projected to attain 166 per cent in 2012!
Greece failed to tackle any of its political and economic weaknesses during the last decade. Worse, it skilfully managed to conceal them from a wider public, engaging in PR operations like the 2004 Olympic Games, which the country could not really afford.
When it finally appealed to the EU and the IMF for help, in the spring of 2010, the patient was already clinically dead, and it will take a decade of sweat, tears and immense political patience to resuscitate it from its mortal affection.
To make things even worse, the EU Commission and member states finance members closed their eyes to what was going on. They did not insist on getting full access to fiscal and macro-economic data. From a sense of complicity, they ignored the continued overstepping of the deficit threshold, making it impossible for the EU Commission to propose any sanctions.
The Greek tragedy should teach Europe two crucial lessons for the future.
Sound government finance and macro-economic policy remain preconditions for prosperity and sustainable development.
Again and again, have we seen countries stumble into political crises due to faulty public finance. Public deficits and excessive public debts therefore need to be addressed as soon as they appear. It is mortal to drag on with them. The USA with a public debt equal to 100 per cent of GDP and a structural current account deficit comparable to that of Greece may soon be another case in point.
The EU will have to see to a strict enforcement of its deficit and public debt rules. This goes for all member countries. But for EMU countries it is absolutely indispensable because of the repercussions of public debt and macro-economic imbalance on the banking system and the stability of the Euro.
The imminent adoption of the six regulations/directives concerning European economic should pave the way for this, in conjunction with stricter legislation on banking supervision.
The EU has learned from the shock. If it succeeds in fully living up to the texts to be approved by Council and EP the Greek crisis will turn out to be very beneficial for the EU and each of its member states. But the jury is still out; and the answer will above all have to come from the Greek political elite and society.
Author : Eberhard Rhein
English, Euro-zone, Greece