Play It Again Europe

Just about every adult on earth has seen this show before.  Greece faces a debt repayment that it cannot meet, for this performance, 86 billion euros due in July.  It needs fresh bailout funds from the European Union (EU) and/or the International Monetary Fund (IMF) because borrowing directly on global capital markets comes at too high a cost, in this case, 10 percent to replace the maturing bonds.  Germany, leading the EU, states that before Greece receives a single euro it must commit to more sever budget policies.  The IMF points out that Greece cannot possibly live up to German demands and that even if it did, the country cannot hope to repay its outstanding debt burden, which at last count stood at 181 percent of Greece’s gross domestic product (GDP).  The IMF goes on to hint that Greece may have to leave the Eurozone.  Throughout this by now familiar point and counterpoint, few focus on Greece’s need for the fundamental economic reforms that offer its only hope of meeting its obligations from its own resources.

Pretty much the same actors are playing the same roles as a couple of years ago when Europe last staged this farce. Greek Prime Minister Alexis Tsipras has assumed his same initial tough stance toward Greece’s creditors, just as he did last time before caving in to EU demands.  German Finance Minister Wolfgang Schaeuble insists that the EU will give no help until Greece broadens its income tax and cuts public pensions enough to create a budget surplus excluding debt service costs, what is called a “primary surplus,” equal to 3.5 percent of GDP and maintain it for ten years.  Greece has countered by saying that it might commit to three years.  The head of the IMF’s Europe department, Poul Thomsen, argues that such goals are impossible, pointing out that even after the last two years of severe budget constraints Greece expects a primary budget surplus of only 1.5 percent next year.  He goes on to stress that such fiscal severity is nonetheless counterproductive given Greece’s depressed economy and fragile politics.

The IMF has a point.  Past budget stringency has failed to relieve Greece’s predicament.  To be sure, Greece has never really lived up to its commitments in this regard, but even watered down, past tax hikes and spending cuts have so depressed growth that progress on public finances has remained problematic.  Since this crisis first emerged in 2010 and Greece first began to comply with EU budget demands, the real economy has shrunk 4.2 percent a year through 2015, the last full year for which data are available.  Unemployment has climbed to 26.2 percent of the workforce, and youth unemployment stands at 49.8 percent.  Because such economic reverses have increased needs for government relief even as they have also reduced government revenue flows from income and value added taxes, public finances have suffered.  German demands for more severe action along these lines hardly seem likely to have a different, more favorable effect going forward.

Meanwhile all seem to ignore the fundamental economic reforms that just might get Greece out of this otherwise untenable situation.  If Greece were to liberalize its famously constraining labor and product laws and ease its restrictions on new business formation, its economy could grow even in the face of stringent budget regimes.  Yet, since this farce’s opening night in 2010, Greek governments left and right have resisted such steps.  Instead, established business interests have managed to keep down competition with a regime of government red tape, extreme even by European standards.  Instead, Greece maintains a set of product regulations that stymies the free flow of goods in favor of existing buyers and suppliers.  Instead, unions and others in established positions have secured themselves at the expense of job seekers behind labor laws that constrain business’ ability to either hire or fire.

If Athens were to unwind this crony capitalist regulatory regime, it would generate an economic dynamism the country desperately needs.  Organic economic momentum would overcome the constraining effects of German budget demands.  The country could break the vicious cycle in which it finds itself now, where budget stringency fails to improve public finances because it also restrains impedes growth, leading to more calls for yet greater restraint that only redoubles the weight on the economy and future budgets.  By promising organic growth, fundamental reforms might even given private investors enough confidence to lend Athens money at supportable rates and obviate its need to go to Europe hat in hand.

But such reform hardy look likely any time soon.  Since Athens has overseen an economic disaster without taking on these entrenched interests that benefit from the status quo, it is a good bet that the current regulatory mess will prevail.  That leaves only two potential paths for Greece and Europe.  In one, Greece fails, stiffs its creditors, and leaves the Eurozone to return to a depreciated drachma.  Greece would have trouble borrowing at supportable rates for years following such and event, and though a depreciated drachma might help Greek exports and tourism, it would further impoverish an already suffering population by reducing the global buying power of its income.  Such and event would also raise still more doubts about the European experiment as it is currently structured.  Or what is more likely, Greece pretends that it will comply with EU, that is German demands, funds are transferred, and a crisis is averted until it become apparent that Athens cannot make the next big payment at which time these same players or their understudies will take the stage for the next remake of this show.



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