A crisis of confidence in the European project

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Greece is in a mess primarily because successive Greek governments failed to take the tough measures necessary to modernise the country’s economy and institutions. If the country was not in the eurozone then it could have taken radical steps of its own to correct mistakes of the past just as the United Kingdom did following the aftermath of the financial and banking crisis in 2008. It could have used its autonomy over economic policy and its independence over fiscal policy to manage asymmetric shocks. For example, it could have printed money and devalued its currency using its exchange rate as a tool of economic management, alongside interest rates.

None of these options were available to Greece because of its membership of the eurozone. And what has been the eurozone’s response to the economic problems of Greece and those of other weak economies in the eurozone?
Increased borrowing provided principally by the wealthier members in the eurozone at relatively high interest rates invariably accompanied by the blunt instrument of austerity: quid pro quo.

In the case of Greece, the pile of debt has become utterly unsustainable in large measure because of the impact that eurozone imposed austerity has had on the Greek economy which has contracted by 25% in the last five years as a result. How can a country deprived of any room in which to grow its economy, ever hope to repay its debts? That is the question the masters of the eurozone – essentially the Germans and their eurozone allies – have steadfastly refused to acknowledge, let alone address.

Syriza’s election in January of this year was the direct political consequence of the last five years of relentless austerity in Greece. The Greek people could see no way out of the vicious cycle of decline and depression and opted for a party which promised an end to austerity within the euro. Therein lies the fallacy: Greek Prime Minister Tsipras has been trying to square the circle ever since.

Mr Tsipras was elected to office but has been powerless all along, even more so, paradoxically, after the referendum which he won resoundingly. He has been naïve because he probably thought that he could have built alliances and that he could have delivered a better deal for the Greek people based on a combination of debt relief as well as economic reforms and policies focused on growth.

This has been virtually impossible to achieve because Mr Tsipras has had virtually no allies within the eurozone and little or no leverage to deliver on his promise of keeping the euro while ending austerity. In fact, his only leverage viz a viz Greece’s creditors was really a threat to leave the eurozone, totally default on Greece’s government debt (which would have hit the country’s creditors hard) and which, if carried out, would have led the markets to recognise that the euro is not an irrevocable single currency but a fixed exchange rate system not dissimilar to what has operated in the past.

His problem was that he had no mandate to follow through with such a threat and his bluff was called. Thus, Mr Tsipras and his Syriza-led government boxed themselves into a corner.

In the absence of any meaningful shift in the creditors’ position, the Greek Prime Minister should have told the Greek people the bitter truth: it’s either the euro with all that that entailed or it is the drachma with all that that entailed – this should have been the choice in the referendum.

Of course, the counter argument is that it should be possible to end austerity and pursue policies of growth within the eurozone but that is not the model espoused by those who currently make and implement the eurozone rules. Proper redistribution between member states, solidarity as an economic necessity not just as a moral ideal, were never on the cards because there was no appetite within the eurozone to take on the Germans and challenge the hegemony of austerity.

So it is not only the Greek government’s approach that is open to criticism. Germany’s brutality and unwillingness to show any real solidarity with Greece has struck at the heart of the eurozone project. Although Germany has just agreed to yet another bailout for Greece, it has done so on terms which will be seen by most observers as the humiliation of an entire nation. That is not the vision of the European Union that most Europeans have bought into.

The euro was meant to deliver economic stability and prosperity and was seen as an essential element of ever closer political and economic union.It has instead become an instrument of torture for ordinary people not only in Greece but in every country which has sought financial support within the eurozone.

The euro’s failure is a failure of leadership to accept that it is not possible to construct a sustainable single currency that makes no allowance for and does not recognise the reality of vastly different economies.
What the Greek crisis has shown is that there cannot be an irreversible currency union without fiscal transfers from wealthier to poorer countries just as there are in places like the United Kingdom and the United States, for example, where that is the price of unity.

The Greek debt crisis has also demonstrated that a eurozone based on endless austerity without solidarity is doomed to fail. So this is not so much a Greek crisis but a crisis of confidence not only in the eurozone but in the sustainability of the entire European Union project.

Peter Droussiotis is Vice-Chair of LFIG and Chairman of PGD Strategy Limited


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Written by Peter Droussiotis