Greece faces a very European problem: Are woes fault of Eurozone designers as much as Greek policymakers?
Greece's economy is a shadow of its former self. It once had thriving investment banks which attracted cash from all over the world and invested it predominantly in the Balkans, helping countries there to thrive after the collapse of the Soviet Union. These operations are no longer.
Its economy produces 30 per cent less than it did it 2009 and is failing to grow. Every second person between the ages of 16 and 24 is out of a job, and the prospects for adults are not much better, with unemployment at 25 per cent.
Its government is close to bankruptcy, but to get more money its bailout monitors are pushing for further cuts to its minimum wage and pension reforms – anathema to the communist Syriza party’s values.
The Greeks also argue they have cut enough already. In 2012 they slashed monthly minimum wage from €877 to €684, a measly €8,200 a year. Many workers who work in the so-called black economy, where business is kept off the books, earn even less than that.
Yet they acknowledge more work needs to be done. Reforms to inefficient public administration, oligopolistic product markets and the justice system areas are essential for success in other areas and should therefore be considered the top priority, according to researchers at London Business School. The Greek government has said it is prepared to do just that.
But its biggest problem is its government debt. Nearly every economist agrees that Greece will be unable to repay, with interest, the huge debts that amount to 177 per cent of GDP, more than double the UK’s. Its finance minister, Yanis Varoufakis, has suggested linking the interest rates on its debt to growth, to ease the burden on Greece and ensure creditors get paid. His suggestion is relatively moderate.
Debt restructuring is opposed by several Eurozone finance ministers. Steve Keen, a professor at London’s Kingston University and an old friend of Varoufakis, accuses the other ministers of ignoring economic reason and focusing on morality. He has a case.
Greece has been accused of spending years covering up its level of debt, and would probably not have been allowed to join the Eurozone otherwise. But some argue that the price Greece has paid has been disproportionate compared with its crimes, due to the poor design of the currency bloc itself.
The Eurozone was not designed to handle banking crises, says Tim Congdon from the Institute for International Monetary Research. The complex system of a European Central Bank with national central banks lacked clarity on important roles such as who would be lender-of-last-resort.
The lack of a robust crisis plan left European banks in a fragile state come 2012. For this reason, the Eurozone was only able to undertake a half-hearted attempt at restructuring Greece’s debt.
Any restructure that would have truly benefited Greece would have been too costly to the fragile European banks that held its debt.
Unable to properly restructure its debt, Greece had to face austerity, or look for transfers of cash from the rest of the Eurozone.
“In Greece’s case, the only real alternative to austerity was for the Eurozone to provide direct transfer,” says Raoul Ruparel, director of think tank Open Europe. “Fine, you say? Well then, let us be open about what this really means. This requires a fundamental rewriting of the Eurozone and EU treaties. Such negotiations often run into years.”
Keen quips that “the only people who should have joined the euro are the Germans.”
He argues that 30 per cent of the debt needs to be written off and the rest restructured if Greece is to stay in the Eurozone. If not, Greece may be better off out.
“They could bring in a national currency and declare that all debts are transformed one-for-one into the new currency so that all euro debts become drachma debts, which itself reduces debts,” Keen explains.
“Then if they refuse not to pay their international debts, they could end up with an economy which, even if it was buffeted by a fall in its exchange rate, would be a fragile but unencumbered open economy. It could start with no financial hindrances.”
Admittedly, Keen says, Greece would need capital and trade controls for a period of time. But he refers to Iceland as a template Greece could follow.
However, it may prove as much as a problem for the Eurozone if Greece performs well outside the Eurozone as if it did poorly.
If the Syriza Party is able to guide Greece to rapid growth, either by writing off debt, leaving the Eurozone or both, it will likely fuel anti-euro or pro-default sentiment across the currency bloc.
Syriza’s Spanish sister party Podemos is gaining popularity in Spain, but is not yet likely to cause an upset in this year’s national elections.