Greece: Pulling Its Neighbors Down with It
European Commission President Jose Manuel Barroso arrives for a European Union summit focused on supporting debt-laden Greece and preventing contagion throughout the rest of the eurozone on Feb. 11 in Brussels. (Photo: Georges Gobet/ AFP-Getty Images)
With the euro as its currency, Greece is facing a booming deficit and a looming crackdown. These are Europe's problems almost as much as they are Greece's.
Before countries signed up for the euro there were many skeptics. A currency without a political union to back it simply would not work, or so the claim went. And no, the European Union is not, in practice, something you can call a union. Diverging national interests and voting preferences have made that goal unachievable for the time being. Even so, the euro has become a stronghold, a trusted monetary unit.
Then the crisis hit the banks. The banks were bailed out, the economy got stimulus injections like never before, and all was well. Or almost. Governments were stuck with huge debts and soaring deficits, and doubt remains as to what will happen when governments put a halt on their flow of money to keep the market's engine running smoothly.
Western nations, even those with high debts—are there still any with low debts?—would do wise to keep spending level up in 2010, postponing cuts until 2011. The reason is simple: Cut spending or raise taxes too soon, and your economy might slump back into recession (Japan in the 90s is the classical example here, but America did something similar in the 30s). Fiscal austerity might be a good thing, though not if this means killing valuable growth, which greatly exceeds an extra year of debt in value.
There is one particular example where the former lines just do not hold, and it is called Greece. They hoodwinked the European Union into believing it was suitable not just to join the E.U., but to share in its currency too. Even after shifting some blame towards Brussels for its naïve idealism, damage has been done to Greece's trustworthiness and the E.U.'s credibility.
In the past weeks, ministers from all E.U. member states gathered to discuss what should happen next. Proposals made by the plagued nation to cut its deficit have been scrutinized and were good enough only for a lukewarm welcome. Do not underestimate the sheer size of the task: Bringing back double-digit deficit numbers to below 3 percent, which is the maximum allowed by official E.U. guidelines, is no small feat.
Greece must cut, or it will eventually have to default, which is not an option within the eurozone. A first step must be raising taxes, not just by increasing percentages tied to the level of income, but also by improving the tax system itself. As it now stands, it is as transparent as a barrel of oil; and a duck-and-cover game makes many able to evade paying their taxes. Another sound step would be to increase pension age. Current retirement-age average lies around 58 years. The new aim will probably be set at 63 years. Compared to a country like the Netherlands—where a fixed 65-year pension age will probably become 67 by 2020—even that could be considered too generous.
A shared currency also means shared responsibilities and risks. So the question this week was: Will Brussels subsidize Greece? The answer seems to be negative, which is very positive. Not just would it be unfair to those who have played the game by the rules, it might also set an example that relaxes stances towards a healthy financial balance. The argument, "Banks were bailed out, why not a nation?" is not very persuasive.
Portugal, Spain, Italy and Ireland are also in tight spots. It is important to make them aware that fiscal prudence must be strived for immediately, and in the long term as well.
Whispers about the International Monetary Fund (IMF) are already echoing in the hallways. This Washington-based institute has much experience when it comes to offering highly leveraged loans to countries. For a European country it would be seen as humiliation to ask the IMF for help, though what other choices are there? The alternative would be for the E.U. to set up its own equivalent of the IMF, but that would cost time and money, plus create bureaucracy, while the IMF is already set to go. Besides, would it be any less humiliating?
Taken on the whole, the euro is still doing pretty well. Its value hovers just below $1.40, which is not worrisome. As the value drops, export becomes more rewarding and attractive, stimulating the economy. This must be prevented on a longer time scale, however, as a cheap euro will make importing products more expensive, which could lead to more inflation.
Brussels will therefore closely monitor the PIIGS (Portugal, Ireland, Italy, Greece, Spain). Greece already got a new deadline of one more month to come up with a decent (read: better) plan. I have no idea how they intend to use their precious time. I would urge them not to label anything as taboo, while seriously considering letting in an outsider such as the IMF, which can bring along a more objective viewpoint, leading to long-term stability rather than short-term wishful thinking. After all, a debt of more than 100 percent of GDP does not exactly radiate a bright light.
If Greece embraces neither IMF nor comes up with a satisfactory plan, then we might, for the very first time, need continental interference in national politics. The Eurocrats will love it.
Jurnan Goos is a Dutch writer who works under the pseudonym Reckless Rose for jurnan.eu.