For small European countries such as Greece, being headline news is not a blessing. It usually means that they have suffered a major natural disaster or are wrestling with political, economic or social turmoil. Greece today is front and center in a storm of bad news.
Greece’s problem is mainly economic and the statistics are stark: a budget deficit of 12.7 percent of GDP (the EU’s target maximum is 3 percent), public debt of 113 percent of GDP (the EU target is 60 percent). The media and international speculators alike wonder whether Greece can stabilize its economy or just go under. They also question whether a Greek collapse will drag down the other deeply troubled Eurozone economies in Portugal, Ireland, Italy and Spain – which, together with Greece, share the politically incorrect acronym PIIGS.
The Greek problems result from decades of profligate spending, over-consumption and an untaxed underground economy that amounts to 30 percent of GDP. But they have also been magnified by the willingness of global banks to help Greece borrow far beyond its means, pushing its sovereign financial obligations into the future with specialized debt instruments and other devices that hid the fundamentals.
Social democratic Prime Minister George Papandreou assumed power after the October 2009 elections. Unlike his predecessor, conservative Costas Karamanlis, Papandreou enjoys a solid parliamentary majority which should last for the next three and a half years. Adonis Samaras, new leader of the conservatives, has clearly indicated that his New Democracy party will back Papandreou’s painful but necessary measures to stabilize the economy and trigger a new development cycle. The Greek political environment will not splinter and stifle attempts to introduce urgently needed reforms to prevent Greece from falling over the economic cliff.
What needs to be done?
The current crisis has forged political consensus targeting reform and stabilization. Both major parties agree: Cut public expenditures by freezing or reducing salaries in the bloated civil service sector, and increase governmental revenues by attacking wide spread tax evasion and habitual corruption and addressing the 30 percent of GDP that the untaxed underground economy represents while also adding new taxes on alcohol, tobacco and gasoline consumption.
But a wave of farmers’ protests, public and private sector strikes threatens to wreck this consensus.
The good news, as shown by opinion surveys, is that an overwhelming majority of Greeks realize the enormity of the economic challenge and support dramatic measures to stop the economic slide. The bad news? Greeks expect “others” to face the music, not themselves—either as individuals or as members of special interest groups.
The second line of defense comes from Greek membership in the Eurozone. During the February 11 EU Council meeting, Greece secured the backing of its stronger West European partners in return for placing its economic policies under the eagle eye of the EU economic commissioner’s supervision, including sustained monitoring to insure that specific goals to reduce budget deficits are met in 2010 and beyond. The larger Western European governments could help by buying Greek debt or providing loan guarantees. Additional support through the European Central Bank may cool the speculators that have driven down the Euro by focusing on one of its weaker links.
While Papandreou welcomed the EU position as helping counter the “psychology of imminent collapse,” he also criticized the EU’s lack of coordination and failure to provide specifics. Some worry that an EU-organized bailout will provide Greece with an excuse to postpone the painful reforms necessary for economic stability.
But can the untested EU mechanisms effectively deal with the challenges facing countries like Greece, Portugal, Spain, Italy and Ireland? Loukas Tsoukalis, a prominent Greek political economist, has summarized things well: The EU “provides for a single monetary policy, a rather loose coordination of national fiscal policies, and a highly decentralized political system to back up the euro. For some people, this … defies the laws of gravity.”
For the required painful measures to work, conservatives and socialists must cooperate to avoid economic collapse. While Papandreou’s party holds 160 of 300 parliamentary seats, it is crucial that Samaras has declared his party’s support for the long-overdue reforms in nearly all sectors of Greek society, economy and politics. Broad political agreement can be fashioned since the critical mass of power is in the hands of the socialist government and its conservative opposition whose leaders were classmates at Amherst College in the 1970s. They should be able to easily stave off the smaller parties on the left who will argue that the country is sacrificing its sovereignty to globalization and world capitalist designs.
Inward-looking Greek commentators will be tempted to ask: Is Brussels today replacing the French, the British and the Russians that competitively “protected” Greece throughout most of the 19th and 20th centuries? They overlook the crucial difference that Greece is now part of a multilateral EU institutional framework and not forced to rely on the bilateral dependencies of its turbulent past. Greece today, like Odysseus, is tying itself to a mast “made in Brussels,” in order to withstand the Siren songs of economic and political populism, extreme nationalism and internal fragmentation that have so badly hurt it in the past. With both Papandreou and Samaras supporting urgent reform, and with EU backing, Greece should be able to undertake the urgent measures the current crisis requires.
