Why austerity is not going to save Greece

Originally published onFeb 26th, 2012

Let us be hon­est: Severe aus­ter­ity meas­ures are not going to work. Cut­ting budgets is not going to save neither Greece nor Por­tugal. It might actu­ally do exactly the oppos­ite. This does not mean that aus­ter­ity and respons­ible budget­ary policies are wrong. Proper fiscal aus­ter­ity and strategies aimed at cre­at­ing a well-balanced budget should be part of every country’s agenda (though not neces­sar­ily the wayGer­many insists). The EU’s insist­ence on aus­ter­ity meas­ures for both Greece and Por­tugal is cor­rect but not in its cur­rent form and cer­tainly not right now!

The begin­ning of…

Greece has not yet defaul­ted but “sav­ing” it will costs European tax­pay­ers more than 145bn euros if data provided by the IMF, ECB and EU Com­mis­sion are any­thing to go by. In Octo­ber 2011 this fig­ure was at least €15bn lower and it seems unlikely that this will actu­ally be enough to ensure Greece will avoid bank­ruptcy this year. Since then Greece has seen the Papandreou gov­ern­ment fall from grace and the cre­ation of a gov­ern­ment of national unity with former ECB vice pres­id­ent Lucas Papa­demos as new prime min­is­ter. The announce­ment that Greece would raise close to €50bn through privat­isa­tion of national com­pan­ies and assets has so far failed to raise even a tenth of the prom­ised income and aus­ter­ity meas­ures have dev­ast­ated the economy.

The Greek pop­u­la­tion does not per­ceive the European efforts as bene­vol­ent but rather express their frus­tra­tion, rage or even hatred for Brus­sels and espe­cially Germany’s chan­cel­lor Angela Merkel and her fin­ance min­is­ter, Wolfgang Schäuble. Instead of see­ing their European part­ners as saviours, Greeks sus­pect foul play and evil motiv­a­tion behind the relent­less European drill of increased aus­ter­ity and pay cuts.

…the prob­lem…

The major issue goes a lot deeper than cor­rup­tion or a failed bur­eau­cracy. The Greek eco­nomy is bloated and inef­fect­ive. The EU most likely knew Greece was not fit to join the euro e.g. the manip­u­la­tion of eco­nomic key data to secure its entry into the euro­zone was some­what obvi­ous, but allowed Athens to join non­ethe­less. The rich and middle-income class have for years wil­fully avoided pay­ing taxes. Most major Greek com­pan­ies can­not com­pete with their rivals in the EU. It lacks eco­nomic com­pet­it­ive­ness and a major cash inflow sec­tor – tour­ism alone is not enough any­more, and products such as olives, rice, fish and cot­ton can only gen­er­ate a lim­ited amount of addi­tional state income. Think­ing about any major Greek com­pany that com­petes suc­cess­fully on the European mar­ket is dif­fi­cult. There is no national air car­rier (unlike in France, Ger­many, Poland, etc.), no major tech­no­logy com­pan­ies (though tele­com­mu­nic­a­tions com­pany OTE is a major player in South-eastern Europe), no phar­ma­ceut­ical firms.

The pic­ture is no bet­ter when look­ing at other factors: No Greek uni­ver­sity is lis­ted in the top 200 rank­ings of the TimesHigherE­du­ca­tion or the Shang­hai Rank­ings, com­pared to 12 in the UK (top 100!; 11 in the Shang­hai rank­ing), Germany’s four (seven) or Sweden’s three (four). Almost half of all young Greeks are unem­ployed. In the third quarter of 2011, so well into the crisis, the youth unem­ploy­ment rate stood at a shock­ing 45%, but even in 2008 was at an EU high of 22,1 per cent, only Spain fared worse with 24,6 per cent!

So, basic­ally Greece has a struc­tural prob­lem that, com­bined with the cur­rent fin­an­cial prob­lem, makes its sur­vival rather unlikely and in the best case scen­ario at least extremely costly. The solu­tion can­not be to give Athens money whenever it needs to repay another instal­ment. Neither can it be to throw good money after bad money. The hair­cut that was dis­cussed in the past few months again and again – let­ting Greece default but agree­ing with its cred­it­ors that it will repay part of its debt – has still not become real­ity. Maybe it would thus be time to take mat­ters into European hands and, together with the IMF, come up with a dif­fer­ent solu­tion? It was a good day when European lead­ers agreed that Greece needs more than aus­ter­ity meas­ures and that the EU as a whole has to focus more on stim­u­lat­ing eco­nomic growth. This is exactly what needs to be done in Greece. The coun­try is broke and it will remain broke, espe­cially after the heavy series of lay-offs and pen­sion cuts which will bring the eco­nomy to a halt very soon, if strikes don’t do it first.

…the solu­tion: investments!

What Greece needs is a mod­ern Marshall-Plan. Instead of cov­er­ing the prob­lems, the Greek eco­nomy needs to be rebuild from scratch. This should allow both Brus­sels and Athens to take more rad­ical steps to a) ensure a return to eco­nomic growth and employ­ment, b) attract for­eign invest­ments, c) calm fin­an­cial mar­kets as this would sig­nal a rad­ical shift towards action instead of re-action, and d) cap­it­al­ise on Greece’s geo­graph­ical loc­a­tion and green its economy.

The earlier men­tioned factors, such as tour­ism and demand for cer­tain agri­cul­tural pro­duce would be sup­ple­men­ted by other income sources. Util­ising wind and solar power would allow Greece to become a major energy exporter. Higher employ­ment rates will ensure more con­sump­tion to revive domestic mar­kets, also giv­ing young people a future in the coun­try. This in turn will pre­vent the dan­ger­ous brain-drain that would leave the coun­try without bril­liant young minds that can con­trib­ute to make the eco­nomy more competitive.

This will not be cheap, let’s be hon­est about it. How­ever, it might pay off a lot faster than keep­ing Greece barely alive at the moment. Con­sid­er­ing the fact that the EU is determ­ined to run the world’s most eco-friendly eco­nomy, it would make sense to take the neces­sary steps now. Help­ing Greece now will even­tu­ally be help­ing the EU achieve its cli­mate goals.