Who Lost Greece?

Jean Pisani-Ferry*

BRUSSELS – The blame game in Europe has not yet begun. An agreement between Greece and its private creditors and public lenders will enable it to meet its next debt repayment deadline of March 20. The Europeans should be commended for a significant step in the direction of realism. Private creditors have accepted a haircut of more than 50% on their claims and a lowering of interest rates, bringing the total debt relief to more than two-thirds.

But, while a solution was found in extremis, many people believe that it will merely postpone the day of reckoning, as Greece will not implement the promised austerity, and will end up either deciding to exit the eurozone or being pushed out following an eventual default.

Even before the latest deal, political leaders in the Netherlands and Finland, and some in Germany, were wondering aloud why Greece should remain in the euro. In Athens, exasperation has reached new heights, and the bitterness of the disputes has started to echo dangerously the rabid disputes over German reparations of the 1920’s.

“Who lost China?” American strategists asked in the 1950’s, following the victory of Mao Zedong’s communists in 1949. Europeans may well soon start asking themselves the same question about Greece.

The main culprit, of course, is the Greeks themselves. The fecklessness of their politicians has plumbed new depths, patronage has poisoned their government, Transparency International’s corruption index ranks their country 80th in the world, and, in September 2011, the Greek treasury had carried out only 31 of the 75 tax audits of high-income individuals promised for the year as a whole.

But it would be too easy to leave it at that and absolve the rest of Europe of responsibility. European officials’ first error was to procrastinate for months, only to produce an unrealistic assistance program that foresaw Greece’s return to the capital markets by 2013. It is now clear that it will take years, perhaps a decade, to reform the economy and correct its imbalances.

Europe’s second error was its incoherent response to the solvency crisis. Two strategies were possible: either an early reduction of Greece’s sovereign debt, thereby restoring solvency rapidly, or mutualization of Greek debt in the name of preserving the collective reputation of all eurozone sovereigns. Either strategy would have been coherent, but Germany and France agreed on a cocktail of both, which was not. The Germans and French pretended that Greece was solvent and lent to it at punitive interest rates, which made the situation worse. It took 18 months to abandon this policy.

The third error was getting priorities wrong. From the outset of the crisis, the International Monetary Fund diagnosed a twin problem: weak public finances and a severe loss of competitiveness. Unfortunately, policymakers focused on the former, and blithely hoped that structural reforms would resolve the latter. The Greek authorities invested most of their meager political capital in budgetary adjustment rather than in building a competitive economy.

The program now being finalized reverses the order of priorities, putting competitiveness and growth ahead of completion of budgetary consolidation. Still, the question remains why this decision had to wait almost two years.

Fourth, nothing substantive has been done about growth. An adjustment program is necessarily recessionary, but this need not thwart efforts to mobilize tools for economic recovery. Greece could in principle have counted on a large amount of regional development aid from the European Union budget, which was underutilized owing to a lack of local co-financing. It took until last summer to recognize – and even then only to a modest degree – that this aid could be used to support economic recovery.

Europe’s final error was a certain level of indifference to fair burden-sharing. It is understandable that the IMF, a technocratic institution, does not venture beyond macroeconomics. But the EU is a political entity that has made social justice one of its fundamental goals. It cannot call for a cut in the minimum wage while assigning secondary importance to tax evasion among the top tenth of income earners, which costs one-quarter of income-tax receipts.

Contrary to much facile criticism, Europe cannot be reproached for imposing austerity on the Greeks. This is the necessary counterpart of a major effort at financial support, and a country with such huge imbalances must inevitably be subject to extreme rigor.

But Europe can be reproached for an initially late, badly designed, unbalanced, and inequitable program. If the question as to who lost Greece arises one day, there will be enough blame to go around.

Jean Pisani-Ferry is Director of Bruegel, an international economics think tank, Professor of Economics at Université Paris-Dauphine, and a member of the French prime minister’s Council of Economic Analysis.

Copyright: Project Syndicate, 2012.
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