Greece in the Euro: Economic delinquency or system failure?

Adam Bennett (SEESOX Associate; Academic Visitor, St Antony’s College, Oxford)

On November 26, Eleni Panagiotarea, research fellow of the Hellenic Foundation for European & Foreign Policy in Athens, returned to Oxford (for the first time since completing her PhD) to reflect on the predicament of Greece and the Euro at a SEESOX seminar in the European Studies Centre (ESC). Greece and the Euro, the Euro, and Greece – separately and together – have been recurring topics of debate at the ESC ever since the onset of the Eurozone crisis. The experience of Greece, at the bluntest end of this economic earthquake, encapsulates dramatically many of the dilemmas and stresses that have rocked the currency union. As Eleni made clear in her presentation, despite the declarations of victory from the ECB and ESM, this sorry saga is not yet over.

The seminar was held at an unusually timely juncture, with the IMF (as lead player of the troika) poised to undertake the sixth review of the Extended Fund Arrangement, amid calls from some quarters that conditions now permit an early end to this arrangement (currently scheduled to expire in March 2016), making this potentially the last review and the last dose of the hated conditionality. With the European funding component of the Troika’s package coming to an end anyway in December, and with Ireland and Portugal already out of the clutches of the IMF, there was an eagerness in Greece to graduate (to use an IMF term) from its program. But was Greece really ready to do this?

Drawing on her recently published book (Greece in the Euro), Eleni argued that the question, “is Greece ready?” is as much about whether Europe (or at least the Eurozone membership) is ready as about Greece itself. Certainly, Greece has undertaken a scale of almost unparalleled fiscal adjustment in the last three years, and can thereby at least claim to have more than atoned for its past sins of fiscal mismanagement. It has cleaned up its banking system sufficiently to pass the ECB’s recent stress tests (though the bank’s lending capacity remains hobbled by the large accumulation of non-performing loans in the wake of the recession). It has also implemented an impressive range of structural reforms – though questions can reasonably be asked whether they are enough, or indeed whether any structural reform could be sufficient to render Greece competitive with Germany without a profound (and perhaps undesirable) alteration of its national character and identity.

Is this achievement, extraordinary as it is, sustainable? Even the IMF’s own projections (see the fifth review published in June) imply that, with debt levels at nearly 175 percent of GDP, stabilization of this ratio is only possible with government primary surpluses (fiscal surpluses before interest payments) equivalent to 4 percent of GDP over the medium term – and with Greece’s (and the Eurozone’s) low growth prospects hereon, possibly for ever. As Eleni pointed out, the IMF’s Fiscal Monitor in October itself recognizes that few countries can sustain periods of positive primary surpluses for very long, let alone a surplus as large as four percent of GDP. It is no wonder that the IMF report on Greece describes the program going forward as “ambitious”. Even though markets appear sanguine about Greece’s debt at the moment, and interest rates are remarkably low, Eleni listed many reasons to question the realism of this ambition – high tax rates (for those who pay them) weighing down private enterprise and living standards, continuing tax evasion (for those who don’t) corroding the sense of justice in the land, more cuts to social programs already stripped bare, and an overall adjustment fatigue which cannot but influence the impending elections.

The position on the external accounts looks somewhat more favourable. There has clearly been a very large improvement in competitiveness, measured in terms of relative unit labour costs. Never mind that this has been achieved more by wage cuts and layoffs, than by underlying productivity growth. But despite this improvement in competitiveness, there has not been a concomitant increase in Greece’s export market share. Greece’s current account of the balance of payments has undoubtedly improved—it scored its first surplus in decades in 2013 which is very good news—but this owes more to import compression and a recovery in tourism than to any real regeneration of the Greek economy. No country can become rich on tourism alone. It is noteworthy that the IMF report for the fifth review still concluded that the real exchange rate was overvalued.

It goes without saying that Greece’s current situation begs the question as to whether the debt reduction package in 2012 was enough, and whether another one will be needed, or whether Greece (and some other countries) are (despite backing away from Grexit in 2012) better off remaining in the Euro, or joining the small (but distinguished) group of EU countries who have chosen to remain (for the moment) outside. Neither of these two questions can be answered without addressing the viability of the Eurozone as a whole. Here again, there has been impressive progress toward reform. Banking Union, the Fiscal Compact, and numerous other initiatives have demonstrated no shortage of resolve to make the monetary union work. But as Eleni pointed out, the Eurozone once had a soul – a yearning and genuine belief that monetary union would strengthen real convergence, improve prospects, and bring about a better common  future. But, she said “the new orthodoxy of fiscal consolidation and structural adjustment has turned membership into something to be endured rather than a conduit for a better future. It has also affected deeply the legitimacy of economic policy-making”. What is needed is a shared responsibility “about making the monetary union and its institutions work for all, not a Eurozone of the north and a Eurozone of the south or periphery, but about inclusiveness and equality: this implies burden sharing in the context of solidarity and the protection of opportunities”. And this is what is missing.

It was noteworthy that, despite the chair and the discussant both having extensive professional experience of the internal workings and mind-set of the European Commission and the International Monetary Fund, there was little disagreement with what Eleni had to say …