Greece’s downfall – where did EU go wrong?

Darius Mikulenas

OXI

OXI – No (Greek). Photo source: Fee Plumley via Flickr Creative Commons.

In the aftermath of the events in Greece, pundits are beginning to provide their view on how Greece itself has created the numerous deadlocks, pushed itself into the current level of crisis, and should bear the brunt of the responsibility. It is true that Greece is still in the process of getting a handle of tax evasion, cronyism and other issues that drain the state’s budget and prevent true talent from entering the public service. Yet for all its problems, Greek crisis in part is the result of the EU’s shortcomings. What was supposed to be an economic issue has quickly become a highly politicized matter. Rules were bent and ignored where it mattered and applied to the letter where flexibility was needed. At times EU lost its cool and technocratic composure, resulting in grand statements that compared the negative outcome of the referendum in Greece to an exit from the Euro.

The first, and perhaps the biggest, misgiving by the EU was the treatment of Greece as a standard case, which it certainly was not. Corruption, tax avoidance and cronyism was and is running deep, and its debt rate was far beyond of other states even before the crisis, requiring a more tailored approach to the problem from the onset.

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General Gross Debt Statistics in 7 EU countries via EUROSTAT.

Greece did not have the property bubble of Ireland, or the oversized banking system of Iceland. Yet despite obvious differences in the initial state of the economy and the reasons behind the collapse, Greece was given the regular treatment – austerity. Here lies the conundrum – how can a country that is already in the ‘red’ far more than any other country in Europe cut even more of its expenses? With a debt of that size, getting back on track through austerity measures is simply not manageable. A country would virtually have to stop spending all together. Although seeing the current situation among the populace, including unemployment and debt figures, it seems Greece is forced to do just that.

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Total unemployment rates in 6 EU countries via EUROSTAT.

It should have been clear that a more flexible, and innovative approach is needed. Greece, already running on a shoe-string budget with little room for maneuver in the social security department, is facing unrelenting rigidness of EU, introducing the second major problem. Greek unemployment levels have risen from some 7.8% in 2008 to 26.5% in 2014, stretching the state’s welfare system to its limits. The Anti-Poverty bill has been greeted negatively from its very inception, stating it is out of line with the pre-agreed reforms. At least at the time, the human aspect was completely ignored and economic rules were elevated as more important. For now, based on the July’s Euro Summit Statement, the program is not marked for review or shut-down, but its sibling the solidarity grant for pensioners (EKAS) is now on its way out and will be completely phased out by 2019, starting March 2016. While the highest funds receiving pensioners will be hit first, what will happen to those who, after the shutdown of the program, will not have enough to live on, which is a very big possibility.The country is already struggling to support those of working age. Only around 15% of all the people who registered to receive unemployment benefits, are actually eligible to receive it. The rest have exhausted their entitlements and are left with nothing. Such a rapid phase out of EKAS is likely to lead to an increased number of people who are simply left with nothing. Those who are already pensioners have no opportunities to increase the pensions so those with no ability to support themselves should have been left as an exception for an extended period of time. Such a rapid wind-down of EKAS raises a question mark over the ‘solidarity’ aspect of the EU and the ‘all for the citizens’ nature of the union.

On the other hand, when necessary, we see flexibility (or rather application of political pressure) that affects the course of events with surprising ease. Take as an example the method of calculating Greece’s debt.The modern method is called IPSAS, which is used and promoted by the European Commission as well as some of the EU member states. Under this system, Greece would be looking at debt of no more than $36 bn – a sum that even Greece can manage. Yet because the Greek bail-out issue is political, rather than technical, an element of ‘flexibility’ is introduced and the very same method promoted by the Commission is not applied to an EU member state, leaving it with a gargantuan, and in a sense an unfair debt. At the same time France has received its third two-year extension to cut its budget deficit. This then is a complete opposite to the rule-based behavior that the EU exhibits, and makes it hard if not impossible to tell when the rule books should be put down.

Greece, as the saying goes, is ‘between the hammer and the anvil’. Acceptance or rejection of all the bailout terms will be painful in any case. The difference is that rejection brings with it the unknown, whereas acceptance of the deal bring a glimmer of hope for the ailing country, although not without  painful concessions. The difficulty of actually solving the issue comes from an inconsistent treatment of Greece and its crisis. In part, the ‘punishment’ of Greece can be explained by need to maintain the support of national electorate by the leaders of member states. Once could also guess that egos are also involved and the refusal to quietly accept bail-out demands brought about the wrath of Germany, among other countries. In any case, the inconsistent and politicized process of dealing with Greece will lead to a long, painful and shaky recovery. One can only hope that both Greece and EU have learned some positive lessons from this mess.

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