Austerity! Bailouts! Taxation!
If one entered Brussels, the mecca of the European Union, a year ago he would likely be greeted with these kind words of welcome, which dominated the political discourse on the Old Continent from 2009 to 2012 when the myth about the Greek economic miracle was painfully dispelled. Shortly after the cabinet of Prime Minister George Papandreou took power on October 6, 2009, the genuine state of the Greek economy came to the surface: a 16% budget deficit adumbrated nothing else but financial insolvency or financial aid and further integration. Naturally, Athens opted for the latter. Unnaturally, however, Europe resolved to, maybe galvanized by the revelation of this unanticipated reality, bush off its political pragmatism and offer help, conditioned upon severe austerity. As a result, the two-edged sword of the French and German bailout induced a vicious cycle of economic contraction and further requests for help from Athens. Furthermore, ardently applying the wrong medicine – that is slashing Greek spending – in an attempt to relieve the symptoms of the problem, the Eurozone powerhouse forgot about the crux of the matter – the existence of a single currency without a single government. In 2012, however, after facing vociferous criticism from world economists, Europe’s statesmen experienced a long-awaited anagnorisis and changed course: the time for increasing incentives had finally come. Had it come for Realpolitik, too?
Understanding the wrongs of Europe’s political maneuvers at the onset of the 2009 sovereign debt crisis entails a quick glimpse at the origins of the Greek financial troubles. Upon its accession to the Eurozone, Greece experienced a huge influx of Western European capital as a corollary to its more open market to German and French investments that resulted from entering the economic union. This boon to the economy and the steady growth of the country’s GDP incentivized Greek politicians to borrow more funds internationally in an attempt to ameliorate conditions at home. However, when the 2007-2008 global financial crisis shook the world markets and bequeathed a four-year recession, foreign capital sneaked away at lightning speed from the country’s economy. As a result, in 2009 Greek politicians faced a 16% budget deficit which rendered them unable to amortize loans, leaving just two options: borrowing more or defaulting on loans. The situation was further compounded by the lower productivity of the nation, which made it even more cumbersome to come up domestically with the money requisite for compensating the outflow of foreign capital. Fearing the ramifications of a Greek bankruptcy on the then-shaky Italian, Spanish and Irish economies, Berlin and Paris rapidly assembled the first bailout package for Athens. Conditioning financial aid upon severe austerity and increased taxation, however, the Merkel-Sarkozy duo endorsed an inexpedient policy of short-term problem-solving with long-term deficiencies. Discombobulated by the sudden implosion of the Greek economy, Germany and France resorted to what Athens needed least – further economic disincentivization – and adding oil to the looming fire of social unrest.
Had the Eurozone leaders given the crisis due consideration and exercised the idiosyncratic European pragmatism when it was most needed, they would have most certainly realized the veracity of Keynes’ thought that “The boom, not the slump, is the right time for austerity”. Essentially, pretending that Greece was not in a financial quagmire was probably the only worst scenario France and Germany could have opted for. Issuing a controlled amount of money so as to tilt the balance between inflation and increased incentives towards the latter outcome is one measure which the Eurozone leaders should have pursued more actively in the beginning. Demanding structural changes from the then recently-inaugurated Papandreou government so as to increase transparency and counteract bureaucratic venality could have helped Greece bring the underground sector of its economy to the surface. Enforcing taxation laws more effectively in lieu of increasing taxation per se could have further reduced the need of slashing Greek expenditures. Trade-offs are, after all, an idée mère in economics. Unwilling to experience an incremental change in inflation and allow proper time for Papandreou’s government reforms to take effect, however, the Eurozone leaders back in 2009 made mostly wrong choices in terms of short-term troubleshooting. Essentially, myopic decision-making took prevalence over pragmatic policies because Europe was too impatient, and maybe fearful, to implement short-term solutions with rather bumpier initial ride as a trade-off for significantly better returns in the future. The year 2012 finally led to the moment of revelation – austerity all of a sudden disappeared from the political discourse, while the European Central Bank stepped in to buy Greek bonds and ideas about printing a certain limited amount of money began to circulate in Brussels.
The rationality and political acumen of Europe’s politicians remains to be tested, however, for stabilizing Greece by no means entails the provision of a viable solution in the long term, especially if expanding the Union persists to be a European objective. Basically, if the situation rests unchanged, no guarantee exists that newly-admitted states will not fall into the Greek trap should another global financial crisis unfold. Realistically, to eschew similar financial troubles in the future, Europe will have to revise the whole concept behind the Euro. The currency was created based on the Deutsche Mark and as such works well for Germany and is well-synchronized with German productivity. Applying it with no adjustments to countries with a far lower productivity, such as Greece, Spain and Portugal, leads to severe discrepancies and, in the end, to situations similar to the current one. Therefore, to ensure the economic welfare of the Eurozone, Europe’s politicians will need to find a way to make the Euro work for all: a “two-tier” euro or a committee within the EU with rights to interfere in the financial policies of all member states could be two viable solutions, but the EU countries will have to decide whether the financial comfort is worth this price. Essentially, they will have to create a more centralized, unified European authority to keep the concept of a unified currency viable or prepare for more financial maelstrom in the near future.
After a three-year respite from pragmatic domestic decision-making – that is the other side of Bismarck’s Realpolitik idea about expedient foreign policy – now it seems as though Europe is finally back on track with reasonable, at least in the short term, solutions to the sovereign debt crisis which has haunted its premises since 2009. The voices espousing austerity have subdued. The European Central Bank has finally taken the initiative. A beam of dynamism and practicality has shone through the clouds of Europe’s institutional and political paralysis. If the Eurozone is, however, to delineate a stable future for itself, it will have to keep reforming in the direction of an ever more federate political entity. True, a more centralized European authority in charge of a unified financial policy entails less internal sovereignty left for every member state. However, no country can both have its cake and eat it, too. Otherwise, “Austerity! Bailouts! Taxation!” might once again become synonymous with “Hello!” in Brussels and if the economy in crisis is larger than the Greek one, Europe will have to salute the idea about a unified currency with a sound “Au revoir!”
Austerity! Bailouts! Taxation!