Could the Greek Crisis Turn into an Opportunity?

Greece has attracted in recent weeks a great deal of rather unwanted and unsavoury attention due to its ailing state finances. The EU Council Meeting of 11 February fell short of announcing a bailout package; it stressed, however, European support for the Greek governments’ fiscal austerity programme and underlined that European authorities would support Greece’s refinancing of sovereign debt, if necessary. European authorities have very good reasons to be concerned about the state of Greek finances. While Greek economy accounts for only a small fraction of the Eurozone economy, the ramifications of a Greek debt crisis would be dire for Europe’s single most important achievement, the Euro. On the other hand, moral hazard considerations are clearly legitimate. European authorities need to find a way to prevent the outbreak of a debt crisis which could spread to other European economies and even affect European banking, without being seen as rewarding fiscal irresponsibility and recklessness.

The resolution of Greece’s fiscal crisis would have been much easier, had the crisis been limited to the economy. Yet the crisis has systemic dimensions, touching upon the political and bureaucratic elites and the people itself. A clear example: Greek governments have admitted twice in the last six years that their statistical authorities provided Eurostat with false data which –temporarily– camouflaged the shortcomings of Greek economy. To make things worse, in both cases, this misinformation was not presented as negligence but rather as a deliberate act. To this, one needs to add the chronic inefficiency of Greece’s enormous public sector. When the current Finance Minister George Papaconstantinou pledges a drastic increase of tax revenues, one can only wonder how he can achieve this target with the existing tax-collecting bureaucracy.  In fact, the recent rise in the spread of the Greek bonds reflects distrust against Greek politicians and bureaucrats. Financial markets in other words are not convinced that even a government with the best intentions will be able to deliver the long-needed changes, if it faces strong opposition from the bureaucracy and the people itself.

The crisis has not left Greek society aloof, either. A society which has been used to living beyond its means for decades due to generous EU subsidies and heavy borrowing at Eurozone low interest rates needs now to face the consequences of decades of irresponsible economic policies. Greeks will have to undergo unpleasant, but long due economic reform to help boost state finances and restore the competitiveness of their economy. Undermining the wellbeing of future generations through reckless borrowing and spending can no more be a policy option. Moreover, it is imperative that the rule of law is restored in a society where anomy is often tolerated. It is hard for the government’s reform agenda to win credibility among creditors and EU partners, when a handful of farmers can ridicule the rule of law throughout the country. Adjusting to the new reality can be a painful process for many. Yet there is no other solution. The era of indulgence is over.

Paraphrasing a commonly quoted adage, Greece and the European Union cannot afford letting the current crisis go to waste. European Union needs to heal the structural imbalances and policy loopholes which became evident during the Greek crisis. In particular, the fragility of the single currency in the absence of an integrated fiscal policy has become evident and needs to be dealt with urgently. On the other hand, to cease being Europe’s “weak link,” Greece needs to put its house into order. This crisis brings exigency to the implementation of reforms which have been postponed for decades. This is a truly Herculean task for the Greek government. Cleaning the Augean stables was one of Hercules’ twelve labours. Prime Minister George Papandreou needs not only to clean, but also to rebuild his own.

(Published on ELIAMEP Blogs on 12 February 2010)