Grexit?

Article by Ole Scheuermann (UWCAC ’14-’16)

The Greek crisis – who is to blame?

Greece is in turmoil. After years of strict austerity measures by the EU and the IMF, the country is running on empty. Years of economic depression and an unemployment rate of over 25 % percent now have their consequences. The parliament has dissolved. After snap elections, the government is now made up by a coalition of a radical left-wing party called ‘Syriza’ and a far-right party, the ‘Independent Greeks’.

The election will have a profound impact on Greece and the rest of Europe. Until now, Greece has followed strict austerity measures that have been imposed on it after its financial collapse. However, the new coalition has announced it will put an end to the austerity policies imposed on Greece. It has already chased the ‘Troika’, a committee that oversees the application of the austerity measures, out of the country. It has also announced to reverse the reforms that were made last years to consolidate the excessive spending of the Greek government. Generally, it wants to increase spending by up to 20 billion a year. The current government budget is about 109 billion a year.

For those who don’t know: Since the economic crisis in 2008/2009, the Eurozone is in a debt crisis. Many countries as Spain, Portugal, Ireland and Greece, have almost gone bust. They have only survived because other wealthy European countries like Germany, the European Central Bank and the International Monetary Fund have lent them money.

As a consequence, those ‘rich’ countries have forced the poor countries to radically consolidate their budgets and become more competitive. They have to cut their budgets and they have to scrap welfare and pensions. We call that process ‘austerity’.

Austerity has had dramatic consequences. Spain and Greece, two countries that were heavily affected, have youth unemployment rates of 50 % or more. In Greece, the GDP has decreased by 25 % over the last years. And their people earn way less than they did 5 years ago.

The austerity measures have never been popular. Germany and its chancellor, Angela Merkel, who pushed the austerity policies, have become very unpopular in Southern Europe. Many say that the rise of Syriza proves that austerity has failed. They say it has always been wrong. They also say that not the penniless Southern Euro countries are to blame, but the rich, solid countries as Germany who have imposed the austerity measures are responsible. A guardian columnist described Merkel as ‘the most monstrous western European leader of this generation’ .

Who is wrong and who is to blame? Is it Merkel? Is it Greece? Is it Syriza?

And: What should we do about Greece? Grexit or keep it?

There has always been a fundamental flaw in the Eurozone. There has always been an incompatible difference between efficient and inefficient members.

On one hand, there are competitive countries as Germany. They have enacted reforms to make their economies more flexible and competitive. They have raised their retirement age to 67, collected taxes strictly always attempted to spend their money moderately.

On the other hand, there are less efficient governments and economies, especially in Southern Europe. Countries like Greece have always been less competitive than the Northern European economies. However, the Euro gave them the same credibility as Northern European countries. With the Euro, they could borrow almost limitlessly. But instead of adjusting their competitiveness to that of the Northern economies, they accumulated large amounts of debts to continue their irresponsibly generous pension and social welfare systems. For civil servants in Greece, they used to be able to retire at around 50.

Austerity is unpopular, but necessary. The Eurozone can’t exist if its members have conflicting fiscal and economic policies. In a global perspective, in a world of the ‘survival of the fittest’, countries need to be competitive. Countries cannot all afford generous welfare and pension systems. Germany, the Netherlands and Belgium: They initiated the reform. Now, all other Euro countries will have to follow. And we are far from finished.

Nevertheless, the austerity measures have a few fundamental flaws. First of all, they ignore that you cannot just cut down on the budget without initiating programs to stimulate the economy. If people earn less, if they lose their jobs and if they don’t see that their efforts pay off, they get frustrated. They elect parties as Syriza who could destroy everything.

Also, austerity alone does not prevent a crisis from happening again. When the current debt crisis is over, countries as Greece can easily start again to spend extravagantly.

What Europe needs is to stimulate growth while making the economies more efficient. The quantitative easing program by the European Central Bank with a volume of 1.1 billion is the first step into the right direction. More programs need to follow. Europe needs to make investments easy and attractive so that there can be sustainable growth after this period of recession. Otherwise, Syriza in Greece was just the start. And the victory of more radical parties all over Europe would not only put an end to austerity, but also to the Euro and probably the European Union.

More importantly, Europe needs a fiscal union. A fiscal union means that one EU institution will decide how the money in all Euro countries is spent. It would mean that not Berlin would decide how its money is spent in Germany, but Brussels. This step is very unpopular and probably politically impossible right now. But only if all countries adhere to the same standards, if all countries follow the same rules and restrictions, than we can prevent excessive, unsustainable spending from occurring again. We do now have a shared currency and a shared ‘credit card’. It’s time to manage our spending together.

Now, in Greece, Alexis Tsipras, the new Prime Minister, has announced Greece will not seek an extension of the current bailout program but it will ask for a bridge loan so it can continue to service its debt. Tsipras also repeated to implement the changes he promised to reverse some of the austerity measures. There is still no agreement between Greece and the other countries. If no solution is found until 28th February, when the current bailout program stops, Greece could default.

Right now, a Grexit seems to be a possible scenario. It may even be the best option. If Greece abandons the pathway of reforms, it has to leave the Eurozone. A Grexit would not really shock the markets any more. If Greece is not willing to do what needs to be done, the Eurozone is the wrong place for it.

Nevertheless, we should give them a last chance. Even though austerity is necessary, we must also approach their needs, Greece’s needs. Syriza wants to write-off half of Greece’s debt. Regarding that Greece’s creditors are mainly the ECB, the IMF and other European governments, a haircut should be possible. It would make it possible for a reformed Greece to start without the burden of the past. It could further boost its economic prospects. And indeed, economists expect Greece as well as other former problematic countries like Ireland and Spain to grow rapidly in the next years. The hard period of austerity seems to pay off. We must not destroy its achievements in the last seconds before our revival.

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