Where’s The Courage In Greece’s Tragedy?Dr. Harry G. Broadman
By Harry Broadman
(Forbes) – Brave Greeks. Sooner or later some member state of the Eurozone would find the courage to speak up about the almost unbearable burden the club’s rules place on a country’s economic officials to make tough policy decisions while tied to a ball and chain. Around the world, nations usually have domestic control over their fiscal as well as their monetary policies. Not so in the Eurozone: only one-half of the policy tool-kit is accessible at the local level.
On June 30, Greece formally fell into arrears with the International Monetary Fund (IMF ). Fortunately for the rest of the Eurozone’s members, it fell to the Greek canary to signal the presence of a highly dangerous leak in the Eurozone coal mine, a leak that had been underway for years, at least a decade. Although it is a bit far-fetched, perhaps the rest of the Eurozone and the IMF should actually consider thanking the Greeks for “volunteering” to conduct the Eurozone’s first real stress test.
If the Greek authorities, the other current Eurozone members and the IMF are smart they would immediately and rapidly switch gears and begin to work collaboratively to devise supportive mechanisms to actually ease Greece’s transition out of the Euro and facilitate the transformation of the country’s economy from excessive austerity to a new path for sustained economic growth.
It will not be easy and mistakes will be made along the way; recalibration of policy remedies will need to be taken. But the lessons learned through such teamwork will come in very handy when the inevitable next leak is detected by other—perhaps many other—Eurozone member canaries, whose countries will then also need to go through similar transitions.
Established in 2002, the European Union’s (EU) monetary union, the Eurozone, of which a subset of 19 EU member states have joined, has been a courageous but ill-conceived policy experiment.
It was one thing to establish the European Economic Community (EEC) in 1957–renamed the European Community in 1993 and then subsumed under the rubric of the EU in 2009. The laudable objective has been to establish an EU-wide single market, where there is free movement of people, goods, services, and capital; common policies on international trade; and uniform policies toward regional development, among other matters. Greece joined the EEC in 1981, followed by Portugal and Spain five years later.
And it is somewhat hard to argue against the expansion of the EEC single market framework from its initial 6 countries to today’s 28 EU countries, although the fact that there are 24 official languages among the current EU member states is emblematic of the challenges that have been (and will be) faced for achieving EU market cohesion.
But when it comes to forming and operating amonetary union—where union member countries all adopt a common currency as the sole legal tender—the governance challenge is exponentially higher. Even the current group of 19 Eurozone members is a very heterogeneous set of states. Just among them there are 21 official languages–more than the number of individual countries. And there is a large dispersion within the monetary union in national income levels, with gross national income per capita ranging from about US$70,000 for Luxemburg to about US$14,000 for Latvia. Therein lies, in part, the real rub with the Eurozone experiment.
When I was an economics doctoral student in the late 1970s, I recall expressing skepticism, shared by several cohorts, about the fancifulness, if not the wisdom, of prospective stages of the ‘European dream’, in particular the notion that individual EEC member states—which would remain autonomous political entities yet organized as a single market to facilitate cross-border trade—would, in addition, be given the ability, subject to meeting certain terms, to adopt the Euro, upon the creation of the Eurozone in 2002.
In theory—of course, the way most economists like to think—it would be cool to not have to carry around multiple currencies while transacting business or traveling within the European continent, and to forgo the time and expense of having to go to foreign exchange counters or banks every time a border was crossed. Those certainly would be benefits of establishing a monetary union. But surely weren’t there going to be other payoffs that would engender really sizeable benefits in total? Why? Because it seemed that fulfilling the Eurozone dream would exact quite significant costs.
What would likely drive such costs? Principal among several factors (beyond the variation in income levels and language) was the huge differentiation existing among prospective Eurozone participants: in the strength of their underlying economic fundamentals, and in their track records for implementing and executing sound economic policies. In the decades in the run-up to the formation of the Eurozone, Greece, like several other EEC countries, such as Portugal and Italy, did not score well in these regards along several dimensions—for example, the ratio of public debt to GDP or the size of budget deficits–especially compared to other EEC members, such as Germany, the Netherlands, and Finland. It seemed the formation of the Eurozone was a recipe for disaster in the making.
Like other individual countries in the world economy, Eurozone governments do have control over their fiscal policy decisions–how much to tax and spend, as well as what should be the composition of such policies, for example, what should be the magnitude of public sector pensions or how high should the tax rate be on individuals at the upper end of the income scale? However, this freedom exists only up to a point: the Maastricht criteria set Eurozone-wide requirements, including the size of budgetary deficits, the extent of public borrowing, and the rate of inflation, all of which must be adhered to by Eurozone member states.
In stark contrast, however, Eurozone members do not control their monetary policies. Zone-wide monetary policy is supranational, controlled exclusively by the European Central Bank (ECB) in Frankfurt. In many ways, the ECB has become the puppeteer of the marionette Eurozone economic policy-makers. If the Eurozone economies were homogenous this might not be a problem. But they are decidedly not, and it has indeed been a huge problem.
One example will suffice. Policy-makers confronting an economy with large deficits against the backdrop of high unemployment and where public expenditures already have been cut close to the social bone, would usually have little choice but to implement a policy of currency devaluation, which all other things equal, would serve to boost exports and thus provide a needed stimulus. Guess what? This has not been an option for Greece, or any other Eurozone economy. They do not have national currencies they control. If you think of economies as a physicist might as closed systems, the pressure has to be relieved somehow. This is where the Greek canary comes in, detecting a dangerous leak in the system. What the ECB did do, however, was to halt the flow of funds to Greek banks, leaving the Greek authorities no choice but to impose capital controls, which has thrown an already crippled economy into the intensive care ward. This may turn out to be the Eurozone’s Lehman Brothers episode.
There is no question that Greek politicians and economic policy-makers—not just the current leaders but those over the last decade and a half—have made significant errors of judgment. Needless to say it happens in every economy around the world from time to time. In the Greek case, one significant policy error stands out: the relatively large size of the public sector in the nation’s overall economic activity. Reflective of this have been generous public sector pensions and provisions that allow for early retirement. Perhaps the Greek’s biggest error, however, was joining the Eurozone in the first place. Don’t the Brits and the Swedes—who, while still members of the EU, did not opt for such a move–look very smart on this one.
So what is in the offing? Here are some possible outcomes to consider: