Greece is the first test case of the resilience of the European single currency at a time of crisis. It is a historically established fact that a banking crisis is followed by a steep increase in public debt, due both to the fiscal support given to the banking sector and to the fall in GDP due to the on-setting recession. Although Greece did not have a banking crisis of the magnitude of other EU member-states, its public finances were hit hard by the recession caused by the global financial crisis. This, coupled with its weak tax-collecting mechanisms and its high public expenditure of recent years (military expenditure, Olympic Games, etc), have led to a great increase in both its public deficit and debt.
Contrary to some media reports, workers in Greece work longer hours than in Germany (an average 2,161 hours annually per worker in 2009, as opposed to 1,382 in Germany). Furthermore, hourly labour productivity increased more than twice as fast in Greece as in Germany in the ten years after the euro was introduced (26.3% in Greece compared with 11.6% in Germany).
The problem has been with the higher rate of increase in both wages and prices in Greece by comparison to Germany, making Greek exports less competitive than German exports. This is at the root of the so-called ‘trade imbalances’ problem in the EU, whereby some countries, like Germany, repressed wages more than other countries, mainly in Southern Europe. In this way, Germany accumulated a trade surplus, which is mirrored in the trade deficit of its partners in South Europe, such as Italy and Greece.
On the other hand, average income per head of population in Greece never reached that of the former EU-15, while in the past year, it has declined to a level well below that of 1980, when it became a full member of the EU1! So while Greeks have been working hard, their income only increased very slowly to the EU average.
The ‘bail-outs’ provided by the EU and the IMF do not solve the problem of over-indebtedness. In fact, they make it worse. This is because the austerity measures to which they are tied intensify the recession of the Greek economy. While GDP is shrinking, the ratio of both the public deficit and debt increase. Further, the ongoing speculation against Greek government bonds keeps increasing the interest rates and therefore the burden of the debt. The failure to regulate such financial actors as the credit ratings agencies and the hedge funds only exacerbates the problem.
One year after the implementation of the first ‘bail out & austerity’ package, the income and living standard of a great section of Greek society have fallen dramatically, while there is no prospect of any improvement in the foreseeable future. Those hit hardest are the small businesses, which are the backbone of the Greek economy, the pensioners and the young, who are emigrating abroad in large numbers in search of a future. Under these conditions, it is not hard to understand why the Greek people are not only indignant, but angry at the political leadership of the two ruling parties, who hid the truth from them and who are still not coming to grips with the problems of the Greek economy and the future of Greek society.
The way the EU has handled the so-called ‘Greek crisis’ has made matters worse. Not only has there been a failure to understand the nature of the crisis and the dangers for the Eurozone more generally, but also there has been confusion on how to solve the crisis.
In spite of its ‘greek’ characteristics, this is a test of the resilience of the euro in a world of global finance at a time of crisis. The current architecture of the Eurozone exposes its members to the speculative attacks of financial markets, yet does not provide for any crisis management policies. It takes a clear European vision and great political will to turn the present single currency area into an economic and political union. Unfortunately, nothing less will do. This is what the experience of Greece and of other countries following in its steps has shown.
Lastly, the plight of the Greek people will not end here. The Greek public debt is unsustainable. Therefore, it will have to be restructured, or there may well be a disorderly default. At long last, the European Council seems to recognize this fact. However, it is feared that the measures suggested on 24 June ? voluntary restructuring and support from the Structural Funds – are ‘too little, too late’. The euro area and indeed the project of European integration is at a turning point. Integration will either need to deepen in order to resolve present problems, or the European Union runs the danger of disintegrating.
Marica Frangakis is an economist and associate of the Transnational Institute, a member of the Euro-Memorandum Group and a member of ATTAC Hellas.
