EU’s Austerity Mirage
THE way the Greeks and their government have been treated tells us a great deal about the way Europe is structured and the dangers that beset it. The technocratic leaders of Greece have lost the confidence of the people, who are rioting because the conditions attached to help from the rest of Europe are so stringent that Greece would be better off in the future without such “assistance.” Yet this is not the first time the world has seen such zeal in the name of financial rescue. During the 1997-98 financial crisis, bailouts from the International Monetary Fund left Asian countries with no choice but the strictest of austerity measures and free-market reforms.
These countries learned their lesson: They insured themselves against future macroeconomic instability – and vowed never to repeat the humiliating experience of an IMF loan – by hoarding their national savings (the result of trade surpluses) and accumulating reserves to be used in bad times.
This accumulation of capital in search of returns was one of the causes of the 2007-08 financial crisis.
In its quest for credibility, the European Union is repeating this pattern, without even noticing that its version is even more violent than the IMF’s. Whether in Greece or Portugal, the recipe is largely the same: a leaner welfare state, pay cuts and layoffs for civil servants, privatisation of state assets and increased market competition through deregulation and the weakening of labour unions.
Greece and the other countries of the euro zone cannot depreciate their currency to gain in competitiveness, as the Asian countries did. They have no choice but “internal devaluation” – that is, wage deflation. At once imposed and provoked by the drop in gross domestic product, this will in the long run lead to the desired result: making Greece a nation of low wages that is welcoming to foreign investors.
But meanwhile, a GDP that is already about 15 percent lower than in 2008 will continue to decrease while poverty increases, unemployment rises, revolt brews and what little democracy is left in Greece shrinks away to nothing.
Why are the Greeks agreeing to such a loss of sovereignty? First, they fear a default would be even worse, as it would prevent Greece from borrowing on the bond market for a long period and would jeopardise the country’s banking system. Second, if Greece leaves the euro, the economic end result might be no different. Yes, the country could hope to recover as Argentina did after it defaulted and then allowed the peso to depreciate, starting in 2002. But Greece does not have the same resources that Argentina did then. It is both central to Europe – the cradle of its civilisation – and peripheral to its geography.
The weakening of Greece’s link to Europe would surely raise geopolitical threats. Finally, the Greeks may genuinely feel guilty for the accounting gimmicks used by previous governments.
The governments of the eurozone are following the same path pursued by the Asian countries – austerity and competitiveness – but don’t have the same chances for success. One or even several small countries can build up reserves without exposing themselves to retaliatory measures from the rest of the world. But Europe cannot do so as a whole. Greece, Spain, Italy and Portugal have no realistic hope of building up trade surpluses and adding their reserves to Germany’s already considerable ones.
This is unfortunate because Europe has much better policy options. The crisis in Europe is more the consequence of an unbalanced Constitution than of an economic problem. In a nutshell, in Europe national debts are the responsibility of member nations, but the common currency is without a sovereign.
This is why the European Central Bank can’t act as a lender of last resort, as the Federal Reserve and other central banks do. It’s true that the European Union, led by Germany, has forced investors to take a “haircut” on the face value of Greek bonds, conditioned on harsh austerity measures.
There can be no doubt that this haircut will deter the financial sector from lending to Greece in the future.
But this could have been avoided, had the European Central Bank been allowed to lend to the government on the same terms it has decided to lend to the banking sector: 1 percent interest a year, for three years. A less severe austerity programme, coupled with a lower interest rate on Greek bonds, would have made the Greek public debt much more sovereign.
Just as the creation of the euro a decade ago ended speculation on intra-European exchange rates, the creation of “eurobonds” would end the speculation on intra-European national debts. That would be a step towards a true fiscal union. But the German chancellor, Angela Merkel, strongly opposes the idea, fearing that Germany might end up shouldering poorer countries’ debts and face higher borrowing costs than it does now.
Europe has turned too quickly towards austerity, jeopardising its chances for growth. A true central bank and a centralisation of European debt would be a better solution; after all, debt and deficits for the euro area as a whole are comparable to or lower than the levels in the United States and in Japan. The leaders of the euro zone, including Merkel, would do better to understand that in economics, as in politics, might almost never makes right.
(Jean-Paul Fitoussi, a professor of economics at the Institut d’Etudes Politiques de Paris.)