Greece: Europe's Test Lab for Economic Reform?
The January 25 election for control of Greece’s 300-seat parliament has implications well beyond the borders of the Mediterranean country of 10.7 million people. In many regards, Greece is a laboratory for the rest of the European Union (EU), in particular the nineteen countries that constitute the Eurozone.
The core issue for European policy makers and their counterparts in Athens is how to reconcile the dual needs of honoring debt obligations and structural reforms with the necessity for economic growth, indispensable to reducing high unemployment and improving the standard of living. Directly related to that is an increasing sentiment in the Eurozone that the grand experiment of a single market and currency is eroding democracy, as decisions made in Brussels are imposed largely by unelected officials without consideration of their harshness or unpopularity. The question hanging over Europe is painfully simple—are Europeans better off now after several years of austerity than before 2010, the beginning of the European sovereign debt crisis?
The answer to that question appears to be “no.” Economic growth has been elusive, actually contracting 0.4 percent in 2013, before making an anemic recovery of 0.8 percent in 2014. Deflation is a major worry, with December’s consumer prices (according to Eurostat) being -0.2 percent.
Unemployment in Greece and Spain exceeds 20 percent; it has recently hit record highs in France, and Italy’s unemployment remains stubbornly above 10 percent. What is worse, youth unemployment hovers between 40-60 percent in several countries, making the outlook for a rapidly aging population even bleaker.
For many Greeks, Spaniards, Italians, Cypriots and Portuguese, Brussels (dominated by Germany and a handful of northern European countries) has too much power in dictating harsh economic terms. Those terms are rooted in the view that it is not wise to live beyond one’s means, belt-tightening is sometimes necessary and northern taxpayers have limited patience with overleveraged southern Europeans. While tough structural reforms have recently worked for countries such as Estonia, Latvia and Ireland, the association in the minds of many other Europeans is that membership in the euro club brings pain, not gain.
Greece is a flashpoint in the debate over Europe’s future. The country was at the center of the European sovereign debt crisis, requiring two bailout packages (2010 and 2012) worth 240 billion euros from the Troika (a combination of the EU, the European Central Bank and International Monetary Fund). In return for that assistance, Greece agreed to a radical economic restructuring, encompassing drastic cuts in pensions, social spending, and state worker personnel rolls. It also included the privatization of state assets and measures to improve the collection of taxes.
While the Troika’s program prevented a Greek default and helped stabilize financial markets, it put the country’s debt to GDP level at 176 percent in 2013, one of the highest levels in the world. The harshness of the Troika medicine pushed the Greek economy into a steep recession, with real GDP contracting by over 20 percent in the 2009-to-2013 period. Unemployment skyrocketed and has remained brutally high, at 25.7 percent in October. It was only in 2014 that the economy managed to return to growth (of around 1 percent).
The reforms have made Greece more competitive and able to better live within its means. According to the Bank of Greece, the economy is expected to grow by 2.5 percent in 2015. The Samaras government’s reforms also led to a considerable improvement in Greece’s fiscal situation. However, economists Barry Eichengreen and Ugo Panizza recently noted that Greece would have to run an annual primary budget surplus (before interest payments) of 7.2 percent until 2030 to approach the Eurozone debt/GDP target of 60.0 percent of GDP. This is not likely to happen.
Greece’s bailout program was supposed to conclude by year-end 2014. However, in negotiations in December, the Samaras government and the Troika failed to reach an agreement. The latter indicated additional spending cuts in the form of another pension cut and an increase in the Value Added Tax of 2.5 billion euros would be required for the government to hit its targets required to release aid. A final decision between the two parties was deferred for early 2015.
The situation was complicated by a Parliamentary vote initially scheduled in late February for the Greek presidency. The Samaras government moved the vote up to December 2014, gambling that its candidate would win, because a failure would trigger new parliamentary elections. If this happened, the major opposition party, Syriza (Radical Left Coalition), stood a good chance of winning and could possibly take Greece down the road to default. The gamble failed and a snap election was scheduled for January 25.