Greece remains the focus of world attention as the newly elected Syriza party strives to achieve a nearly impossible goal: fulfill election pledges while convincing Greece’s creditors to change a bailout package that pulled Greece from the brink of default.
The question is, can Greece pull itself out of the hole it’s in and improve prospects for growth and a healthy economy? The answer is, not without help. Even then, the prognosis is uncertain – including whether or not Greece will remain in the Eurozone for the long haul.
Greece’s economic problems have deep roots that predate the 2008/2009 global recession; they will take many years of consistent, hard work to resolve. The latest standoff between Greece and its Eurozone partners has laid bare the divisions between the two sides. A Feb. 20 accord, reached after tense negotiations, saw Greek Finance Minister Yanis Varoufakis give ground by requesting a four-month extension of the current bailout plan – something he had insisted he would never do. This four-month window gives officials on both sides more time to try to narrow the wide gulf separating them.
It’s clear that Greece can’t repay all its loans – equal to 175 percent of Greece’s economy (GDP) – on schedule without something changing: either longer maturities, lower interest rates, debt forgiveness or some combination. It’s also clear that most Greek voters are at the end of their tether when it comes to budget cuts and reform programs, which is why they swept the Syriza party into power with its promises of an end to austerity.
What’s less clear is whether officials – and voters – in other European countries (not to mention the European Central Bank and IMF) are prepared to continue extending aid to a country that they believe isn’t willing to do enough to help itself. During the most recent Eurozone face-off, Greece was essentially isolated, unable to find support even among other countries on Europe’s periphery that suffered through their own crises and subsequent reforms. Those countries, as much or more than others, believe Greece should take its medicine as they have, unpalatable though it may be.
Syriza won office by pledging to restore government jobs, raise public salaries and the minimum wage, halt the sale of Greece’s government-owned companies and assets, and otherwise scuttle much of the recent reform program. There’s no doubt the Greek people have suffered greatly from Greece’s latest economic turmoil, which has seen the economy shrink roughly 25 percent and unemployment top 28 percent, with at least 50 percent youth unemployment.
But it’s important to recall where Greece was before its most recent crisis and bailout program. When Greece joined the Eurozone in 2001, it became part of a currency area that had Germany as its anchor. To investors in Europe and around the world, lending to one country in the Eurozone was seen as being as risk-free as lending to Germany had been, with its well-run economy and conservative central bank.
Greek officials quickly took advantage of an influx of cheap money. They doubled government wages, which caused private-sector wages to rise as employers competed for workers. They vastly expanded public job rolls and increased public spending, including $14 billion on the 2004 Olympics, more than twice the budgeted amount. The retirement age for some groups was lowered to 50, and many workers were paid 13th month and 14th month bonuses. By 2012, 75 percent of total Greek government spending was on public sector wages and pensions. The budget deficit and public debt skyrocketed, while Greek competitiveness and investment levels fell.
The irony of Greece’s recent vote against austerity is that Greece’s economy is finally showing signs of life and its budget is near balance. But the die has been cast. Nearly everyone involved in this high-stakes drama has an interest in trying to preserve the Eurozone as it currently is configured, with 19 highly diverse economies. The question is, how high a price are others willing to pay to keep Greece in?
While I believe Germany (and other surplus countries in Europe) could and should do more to help ease some of the Eurozone’s imbalances, only Greece can resolve its underlying competitiveness problems – including its rampant tax evasion and corruption.
If Greece leaves the Eurozone –willingly or unwillingly – many observers fear that market pressures may force other countries to follow suit. But finding a way for Greece to build a path toward long-term competitiveness within the single currency area may prove a step too far.