Greece faces the renewed struggle of stayin’ alive, writes Joseph Mariathasan, but has the euro-zone really done enough to stimulate economic growth and avoid tragedy?
The news that Greece’s prime minister Alexis Tsipras is resigning, triggering an early election, should perhaps not be a surprise, given the country has now agreed the terms on a €86bn rescue program accepting tough austerity measures that fly in the face of the promises on which the Syriza party was elected. But it also reflects an assessment of the reality that faces Greece and also the EU.
The Greek newspaper Kathimerini in March published a sketch featuring Yanis Varoufakis, the then-current Greek finance minster. In it, Varoufakis tells a gathered crowd: “Ladies and gentlemen, I present to you the ‘Brussels Group’, aka the Bee Gees, who will sing to us ‘Stayin’ alive’.”
That cartoon is still relevant, albeit now needing to replace Varoufakis with Euclid Tsakalotos. But for both Greece and the rest of the EU’s sake, the country has aim higher than simply stayin’ alive. That means both the EU and Greece need to come to a consensus on just what it means to be a member of the club. Indeed, one can ask, as former Fed Chairman Ben Bernanke did in July, whether Europe is holding up to its end of the bargain? Specifically, Bernanke wondered, is the euro-zone’s leadership delivering the broad-based economic recovery that is needed to give stressed countries like Greece a reasonable chance to meet their growth, employment, and fiscal objectives?
Clearly, the answer so far has been a resounding ‘no’. But an EU characterised by massive trade surpluses produced by a regional hegemon cannot hope to be a stable entity. As Bernanke points out, Germany’s large trade surplus puts all the burden of adjustment on countries with trade deficits, which must undergo painful deflation of wages and other costs to become more competitive. The breaking of the taboo over membership of the euro in July, when European finance ministers raised the possibility of Greece departing and being alone again, has demolished the idea that the Hotel euro-zone, like the famed Hotel California, is only programmed to receive. You can check out any time you like, but you just can never leave.
The issue that does need to be squarely addressed though is whether, as many are now suggesting, the EU would be better off if Germany left the euro-zone rather than Greece. Its currency would appreciate dramatically, reducing its trade surplus, but the value of its euro denominated debts would go down when measured in Deutsche mark. If the Netherlands, Finland and Austria followed suit to form a northern euro-zone whose currency would appreciate against that of the remaining Euro, it would potentially help to solve many of the imbalances that now exist.
Whilst such an outcome may be fanciful, the issues it raises are not going to disappear. But for Greece, its problems are not going to be solved by just replacing its currency. The benefit to Greece of joining the euro-zone was the hope for macroeconomic stability and the psychological assurance that participation in the euro would bring Greece closer to the western European countries within the EU and thus enhance its security against what it perceived as aggressive and unstable neighbours surrounding it. Greece now looks an anomaly within the EU. It may still be classed as a developed market by some, but it is at the bottom of the rankings – and has already been reclassified as ‘emerging’ by MSCI, S&P and others.
It has structural problems that its post-war governments have never been able to solve, such as corruption and tax evasion that make it closer to an emerging market than a developed. Greece’s population will have suffered a sense of déjá vu as their political classes failed to develop a modern European state. The election of Syriza was a reaction to that failure. Yet Syriza itself, incorporates elements that are hostile to what Greece needs to become prosperous – the development of a vibrant private sector. The contrast between the private sector in Greece and Germany’s Mittelstand, the hugely successful SMEs that have provided the backbone to Germany’s economic success, is striking.
Another telling comparison is with the SME space in Italy’s north, which has gone through various transformations from embroidery to car parts, retaining the strong links and support between them. Perhaps the EU should focus less on austerity for Greece and more on how the frameworks that support the Mittelstand in Germany and the SME space in Northern Italy can be encouraged in Greece.
If the EU allows Greece to fail now, it may be economically acceptable, but it may well destroy the political vision that ultimately holds the EU together. The ramifications of that may be uncontrollable.