Why Europe Needs to Save Greece
APR 12, 2015
STOCKHOLM – The
fundamental problem underlying Greece’s economic crisis is a Greek
problem: the country’s deep-rooted unwillingness to modernize. Greece
was subject to a long period of domination by the Ottoman Empire. Its
entrenched political and economic networks are deeply corrupt. A
meritocratic bureaucracy has not emerged. Even as trust in government
institutions has eroded, a culture of dependency has taken hold.
The Greeks, it can be argued, have not earned the right to be saved. And yet a Greek exit from the euro is not the best option
for either Greece or for the European Union. Whether or not the Greeks
are deserving of assistance, it is in Europe’s interest to help them.
The OECD, the
European Commission, the International Monetary Fund, and the World Bank
have emphasized, in report after report, the fundamental inability of
Greece’s economy to produce long-term sustainable growth. The country’s
education system is sub-par and underfunded. Its investments in research
and development are inadequate. Its export sector is small.
Productivity growth has been slow.
Greece’s heavy regulatory burden, well described by the World Bank’s indicators on the ease of doing business,
represents a significant entry barrier in many sectors, effectively
closing off entire industries and occupations to competition. As a
result, Greece’s economy struggles to reallocate resources, including
workers, given the rigidity of the labor market.
After Greece was
allowed to enter the eurozone, interest-rate convergence, combined with
inflated property prices, fueled an increase in household debt and
caused the construction sector to overheat, placing the economy on an
unsustainable path. In the years before the beginning of the financial
crisis, current-account deficits and bubbly asset prices pushed annual
GDP growth up to 4.3%. Meanwhile, public spending rose to Swedish
levels, while tax revenues remained Mediterranean.
In the eight years
that I served on the EU’s Economic and Financial Affairs Council, I
worked alongside seven Greek ministers, every one of whom at some point
admitted that the country’s deficit numbers had to be revised upward.
Each time, the minister insisted that it would never happen again. But
it did. Indeed, the pre-crisis deficit for 2008 was eventually revised to 9.9% of GDP – more than 5% higher than the figure originally presented to the Council.
And yet, as bad as
Greece’s economy and political culture may be, the consequences of the
country’s exit from the euro are simply too dire to consider. In the
end, such an outcome would be the result of a political decision, and
the European values at stake in that decision trump any economic
considerations.
For starters, a Greek
exit from the euro would be a devastating blow to Greece. Without the
support of the European Central Bank, the country’s banking system would
be shut off from international markets. The overall use of the
euro-system liquidity assistance to Greece came close to €90 billion
($96 billion) in early 2015. The government would have to close the
banks for a week or two, print emergency currency, strictly limit
households’ access to their deposits, and introduce capital controls.
When the market opened again, the new drachma would depreciate by 30-40%
before finding an equilibrium.
To make matters
worse, the economic crisis could lead to a political meltdown, making it
impossible to enact the structural reforms that Greece desperately
needs. Indeed, one of the main causes of the country’s deep economic
problems is its dysfunctional political system. The period of fiscal
restructuring – during which the deficit was cut from 9.9% of GDP in
2008 to 8.9% in 2012 – already sparked considerable civil unrest. A
deeper economic crisis could spark a sharp rise in social and political
instability. Ejecting such a precarious democracy from the eurozone
would be deeply irresponsible.
Europe also needs to
consider the geopolitical environment. Increased tension caused by the
conflict in Ukraine risks destabilizing other parts of the continent.
Expelling Greece into such an unstable international environment would
leave the region more vulnerable to those – particularly Russia’s
current leaders – who believe they would benefit from a weaker, less
unified Europe.
There
are more important questions raised by the crisis in Greece than
whether the country deserves to be rescued by European taxpayers. At
stake are fundamental values and strategic considerations that are
central to the European project. Europe is simply more European with a
stable partner in Athens.
Anders Borg, a former Swedish finance minister, is Chair of the World Economic Forum’s Global Financial System Initiative.
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