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The Greek Tragedy

by on June 28, 2011

It is Greece’s shaky politicians, not the global crisis, that have led it to financial ruin, say Lawrence and Henry Gruijters. First Published on The Graduate Times.

Image courtesy of Zola Chen

So far Greek politicians have not been punished for irresponsibility; only rewarded for spending. A bigger and sharper stick should be yielded to avoid repeat.

Many wrongly blame the financial crisis for any recent financial difficulties. The Greeks are no different. The financial crisis may have accelerated the process, but a Greek crisis had been looming even before their last default in 1998.  Greece has been struggling with fiscal disorder since the early 1980′s. The Greek economy has been notoriously uncompetitive. Its global competitiveness index has constantly been slipping –  even in the “boom” (2000-2007) Greek competitiveness fell. A major reason for being uncompetitive is the dismal public sector performance: 55 per cent of the Greek national product goes into the salaries of public sector workers. There are more than one million government servants in Athens. In addition, there are many mismanaged public sector companies that should be privatised and which are currently subsidised by the government. Combining this mismanagement of funds with the fact that Greece is the least efficient collector of taxes within the European Union leads to a situation where public deficits are a structural problem.

Northern European countries have had many reforms to ensure the competitiveness of their economies. These reforms include: privatisation of utility companies and banks, and the reform of labour laws and entitlements to special interest groups. Due to the vested interest of part of the population these measures are hardly ever popular and it takes brave politicians to commit to these policies. Unfortunately, Greek politicians have traditionally been fearful, ignorant and weak. Greek politicians have more often than not chosen to default — such as in 1983, 1985 and 1998 or to devalue their currency…

Now Greece is part of the Euro, it has benefited from a lower borrowing rate but has not used this economic upswing to make appropriate reforms. Now the inevitable has happened and it does not have the option to default or devalue its currency. It must now do what it should have done three decades ago: reform. The main problem is that given Greece’s history, who really believes politicians will be able to reform the country’s economy?

The only solution is taking fiscal power away from Greek politicians and giving it to the European Union entirely. Furthermore, this should become a standard procedure whenever a country breaches the Stability and Growth Pact for a period longer than two terms of government. The loss of sovereignty is the ultimate threat to politicians, and a sure way for them to loose the following elections. Markets will see this threat, find it credible, and believe that appropriate reforms will be taken by politicians to ensure fiscal stability within the monetary union.

Many may feel, like the demonstrating Greeks, that this is a new type of colonialism, which infringes on national sovereignty. Yet sovereignty has not done the Greeks much good. A default and leaving the Euro will mean a return to the old ways and a continuation on the series of Greek defaults and economic underachievement. With the advantages of joining the Euro comes the responsibility of stability. If certain politicians cannot credibly promise responsible policies, they should be coerced into action. Like all behaviour, political behaviour needs to be governed by both a carrot and a stick. If the stick is hard and sharp enough, the hope is that it will not need to be used often.

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