German chancellor Merkel has proclaimed that Europe needs to find “redemption” from its economic sins through austerity. In Greece another round of austerity measures could push the already fragile economy toward collapse and the public toward desperate alternatives.
Merkel and Finance Minister Schäuble recently pledged that there would be no new bailout measures for Greece or “haircuts” on holders of its sovereign debt. Financial markets believe these assurances are aimed at the German public before the September 22 general election, because markets know further assistance or debt write-downs to prevent a Greek financial collapse are well nigh inevitable.
There is some good news in Greece: the country may achieve a primary surplus in its national budget by the end of the year. The vital tourism sector is recovering, the beneficiary of turmoil in Egypt, Tunisia, Turkey and elsewhere. The new TAP pipeline to carry Caspian gas to Europe will be built across the northern part of the country. The governing centrist coalition—down to two parties from three—is cohesive enough not to face early elections (because serving ministers know they would lose their jobs).
The core news, however, remains very bad. Greece is in a depression, not a Great Recession like the rest of Europe. The losses in middle-class and working-class living standards are brutal. Prospects for young people who do not go abroad are dire. Prospects for their parents are not much better.
The economy is simply too weak to meet the goals laid down in the current European Union (EU) “bailout” package. Without some restored growth, fiscal policy will fail again. Potential earnings from privatization schemes are quite modest, while promised reforms in the bloated public sector are largely pipe dreams. Greece is a small and narrow economy, sustained by tourism, shipping, remittances and EU subsidies. It produces some agricultural exports, but very little else. Except for EU membership, Greece would be a third-world economy, with comparable living standards.
In recent decades, however, middle-class Greeks became accustomed to a European living standard, which is now lost. Note, it is the frustrated new middle classes that have taken to the streets in Brazil, Turkey, Russia and Egypt. Greece also has an increasingly militant working class that never enjoyed much of the new prosperity but is suffering disproportionately from EU-imposed austerity.
Greece created its own mess, but the crisis is unlike elsewhere in Europe. There was never a housing bubble; households held very little debt and the banking sector was relatively sound until the public sector imploded. True, all Greeks participated in a political culture that encouraged uncontrolled government deficits and outright lying in national accounts. In Greece, patriotism is strong, but civic responsibility is weak. The state is an abstraction with little moral suasion on citizen behavior, while violence remains an accepted form of political speech. For decades, the country’s political elite—both left and right—steered Greece toward disaster with a blithe belief the day of reckoning could be avoided indefinitely.
Nonetheless, when the crisis came in late 2009, the new administration of George Papandreou did not take the route of unilateral default on the country’s sovereign debt. This was a departure from established Greek practice. Had it done so, Greece might have better economic prospects today. The move would have destroyed the country’s credit for a time and imperiled its banks, but the damage would have been swift. Control of public policy would have remained in Greek hands. Instead, Athens chose to entrust its fate to its European partners.