What Greece Has Reminded Us About Europe
I am one who believes that we are entering the last few chapters of the present Greek economic drama. But the larger issue of the eurozone’s prospects, forget about Greece’s, is another thing altogether. That could take several years to sort out.
I’ve always been persuaded by the argument that the creation of the euro was always half-baked. And this would be revealed most strikingly during a recessionary period. Consider the United States. It is a continental economy and at any given time geographical parts of its economy will be doing well while other parts are doing badly. Thus even during the Carter recession, the West Coast and the South were still growing even as the Midwest and the Northeast were in deep dudgeon. But a single economy like the US balances this out. Workers from the negative growth areas move to the postive growth areas. Richer parts of the country pay more taxes which are used to pay for the dole being handed out to the poorer parts. The system eases the pain, lays the basis for future growth.
The eurozone doesn’t have this compensatory mechanism. There are internal transfers within the European Union but they are small in size and government-to-government so it is not clear the right individuals get the money. Labour markets remain riddled with barriers in Europe. They exist between countries. They exist within countries. It is just difficult for an unemployed person to move from, say, Spain and go job-seeking in Estonia. So if I’m a eurozone country getting hammered in a downturn, I don’t have too many ways to start climbing back upto prosperity. Among other things, I’ve even surrendered the ability to devalue my currency and give myself a fillip to exports or tourism.
But the euro had another problem. Because it was a global reserve currency, backed by biggie economies like Germany and France, it meant that inefficient euro-using countries could borrow with consummate ease. It may have been a Greek government bond but it was a eurozone product and had the European Central Bank somewhere in its background. So Europe’s southern tier – the countries running from Portugal to Greece – borrowed heavily, lived well off the debt but did nothing to make themselves more competitive. To use a human analogy, they lived off their credit cards rather than getting higher-paying jobs. They saw wages, for example, rise by 20 to 30 % over the past decade in these countries even as productivity was stagnant.
But countries like Germany don’t get away scot-free. They developed their own G-2 sort of relationship within the eurozone. In other words, in just the same way that China would finance US government debt to ensure that Americans kept importing its products, Germany and France bought huge mountains of Greek and other PIIG debt to keep them buying their exports. Well, it’s all begun to unravel.
Greece’s fraudulent accounting, combined with the present global slowdown, means it is getting squeezed badly. But its government can do very little to help itself. It can’t devalue its currency. Its people will have difficulties moving to other parts of Europe, Union or no Union. So it needs a big transfer of money. That means bailout – and Germany is baulking at the idea. As eurozone skeptics had warned: when the going gets tough, things will be really tough for poorer Europeans. Greece will continue to bob up and down for a while. Get this: this is actually a mild year when it comes to debt repayment for Greece. It gets worse in the years to come. And then throw in its budget deficits. The present 45 billion euro bailout is just a down payment. It will only cover Greece’s red ink until December.
But the real issue is that even if Greece, Portugal and their ilk survive the present crisis, they will be back in the financial doghouse if they do not become competitive economies. I suspect that one will find that after they joined the eurozone their interest in carrying out painful but necessary domestic economic reforms simply disappeared.
So to stop all this from happening all over again and to ensure Europe will face future recessions without leaving bits and pieces of itself mired in recession, the game will be to make the PIIGs fly in terms of competitiveness. Don’t hold your breath. Things will have to get a lot worse before these countries restructure themselves to that extent. As one African diplomat in Paris told me years ago, “Africa begins south of Geneva. The southern Europeans are just like us.”