Don't Expect a 'Grexit': Greece Can't Escape Europe

While Russia and China may be courting Greece, Athens' fate still lies in Europe's hands.

Global financial markets currently obsess about the fate of a small Balkan country’s sovereign debt and its impact on the Eurozone. However, if the burden of Greek debt were to disappear overnight, the miracle would just reveal the underlying weakness of the Greek economy and its dependency on Europe for the foreseeable future.

Since the Hellenic Republic entered the European project (then the EC) in 1981, the brutal truth is that only massive European transfer payments have separated Greece from the status of de facto third-world economy. The Greek economy is both narrow and shallow, and has been for many generations. The country’s most valuable export has been people, whose talents and achievements do not merit the recent jibes of the German tabloids. Even today, Greece produces relatively little and can export even less. The domestic economy does not remotely earn enough to pay for the country’s vital imports, especially energy. Greece lives on—lives on, mind you, not just maintains its lifestyle with—externalities: tourism, shipping, remittances and EU subsidies. The modern face of contemporary Greece—its highways, airports and the Athens Metro—were largely paid for by EU counterpart funds. The most vital aspect of EU membership for Greece is the freedom of its people to work elsewhere in Europe at will and then send money home. Thus, even without the debt crisis, Greece is no more fully sovereign in economics than it is in military security.

Greek households are not the problem. Indeed, the average Greek is a model of financial probity (except as a taxpayer). Greek households maintain little debt, value education for their children (no small task, given the atrocious state of public higher education) and use increasing prosperity to acquire real property—mostly real estate—rather than to finance short-term consumption. Greeks are not inherently indolent, but nor do they justify their self image revealed in a recent Pew Trust study as the hardest workers in Europe. Context determines their efforts. When properly motivated, Greeks are diligent, but many Greek institutions—above all, the massive state sector—motivate in the wrong direction. It is instructive to look at Greeks in other contexts, such as America and Canada, Australia and New Zealand, South Africa and Kenya, and even Germany. Greek effort and enterprise abroad are a tribute to what people coming from an inherently hardscrabble heritage can achieve.

The Greek state is quite another matter. There is nothing novel about the current debt crisis. Since attaining independence in the early 1830s, the modern Greek state (whether kingdom or republic) has been in default the majority of the time. Many people thought entry into European institutions would bring that tradition to an end, but exactly the opposite was the case. The financial profligacy of the Greek government in the 1980s under the leadership of Andreas Papandreou and his PASOK party is well known, but it was modest in comparison with the period after Greek entry into the Eurozone in 2001, and especially under the center-right New Democracy government of Constantine Karamanlis. It was a pro-business government of the right in Athens that ran surreptitious state deficits comparable to those of Venezuela today, but without oil revenues.

Greece could obtain massive loans because it benefited from the widely held fantasy that all Eurozone sovereign debt was more or less equally safe due to an implied (though fictional) guarantee of the European Central Bank. Had Greece remained outside the Eurozone, its ability to borrow would have been constrained by market realities. In the event, Wall Street assisted Athens to behave like a nineteenth-century banana republic on the assumption that Eurozone governments had a safety net in Frankfurt.

The financial crisis facing the new PASOK government of George Papandreou in 2009 required a basic choice: should Greece follow its traditional path and default on its debts, or behave like a good European state and manage its obligations in cooperation with its Eurozone partners? The younger Papandreou, a former foreign minister deeply dedicated to his country’s European future, chose the latter. In retrospect, this may have been a blunder. A default would have inflicted massive short-term damage on the Greek economy, but much of the financial pain would have been exported to France and Germany, whose banks and pension funds were major holders of Greek government bonds. The ensuing EU “bailout” of Greece was actually nothing of the kind. Governments in Berlin and Paris desperately wanted to avoid domestic bailouts of their overstretched banks, so financed a restructuring of Greek debt in order to keep the contagion at a distance. The consequence for Greeks was even more austerity than might have followed a default. Many Greeks believe they have suffered to maintain German prosperity, and they may be right.