Europe’s leaders are sowing the seeds of the euro’s collapse

The enormity of the task has been consistently underestimated. Imposing more austerity will only make things worse.

Share
Related Topics

General strikes, violent protests in the streets – Greece is in turmoil again. And yet a lot has changed since the last serious riots that the whole world followed anxiously on their television screens. First, the fall of a well-known, charismatic and urbane Socialist Prime Minister, George Papandreou, scion of a dynastic family that had dominated Greek politics for decades.

Then a technocratic government for a while that negotiated Greece’s second bailout, and two elections. The first was inconclusive, reflecting the strength of feeling after many years of hardship. So in May, the people voted in protest, leading to a rise in popularity of extreme left- and extreme right-wing parties but managed second time round in June to end up with a coalition of the centre.

The result was a strange alliance involving what had been, until recently, the two leading parties of centre left and centre right that had ruled Greece practically uninterrupted for decades. But by voting the way they did, the Greeks had given a signal that though they were overwhelmingly in favour of staying in the euro, they wanted the harsh austerity medicine to be eased. Five years of economic decline had left the country riven with serious social and political tensions.

The new centre-right-led government was given the mandate to renegotiate the terms of the austerity package, but the men in charge, particularly the new Prime Minister, Antonis Samaras and his technocratic finance minister, the respected Yannis Stournaras, have been trying to convince other European governments and the International Monetary Fund that they can effect change.

The Greeks have not been the most straightforward negotiators in the past, which has caused a lot of frustration, and they know that they need to change. But even if the will were there, it is a sad truth that the Greek administrative system is very inefficient and is in need of a substantial shake-up to move itself into the 20th, let alone the 21st century.

So little gets implemented. And this isn’t helped by the fact that the Greeks have the reputation of being lazy, enjoying huge perks and generally not keen to pay their taxes. Yet people forget that (if one believes the statistics) in fact Greece has the longest working hours in Europe and the Germans – where the population by and large believes that the Greeks should get no more financial help – have among the shortest working hours, though obviously are hugely more productive. It is, of course, also true that tax revenues are low because the culture of not trusting the state to spend taxpayers’ money is rife – as is the general dislike of politicians who are believed to have long exploited the system to line their pockets. This type of inherent mistrust of the state is hard to break and will take time to change.

And yet there is a positive side: the country achieved a very substantial cut in its deficit in year one of the crisis. This fell from 15 per cent of GDP to 10 per cent between 2009 and 2010 before the markets started worrying about the debt level and then Greece was no longer able to borrow in the international bond markets. And it is now likely to move to a primary surplus next year – in other words, current spending and revenues may well move into balance in 2013!

Some progress, indeed, but not much to cheer about because it will be achieved mainly through further cuts in wages and salaries, and by not paying contractors. In an economy that is declining rapidly – by 17 per cent in the last four years, probably contracting by a further 6 per cent in 2012 – raising enough tax revenue is difficult as companies are going bankrupt with the unemployment rate standing at around 25 per cent, a trebling over four years. Youth unemployment is more than 50 per cent.

There is a lot that can be said against Greece and its politicians. But it is clear that the country is not unique within the eurozone in the problems it is facing. Spain, the fourth largest European economy, is trapped in a major banking crisis and possibly about to ask for a proper bailout – and not just for its banking sector.

It has a similar unemployment rate to Greece’s and has also been hit by strikes and demonstrations as it unveils further cuts on top of the €60bn announced in the summer. Both countries are in recession and facing drops in GDP this year and next – and both need to restructure and liberate their economies.

Spain is only just now beginning to impose austerity measures that are raising taxes, hitting welfare, unemployment benefits, pensions and public-sector wages. Greece has already seen cuts of between 25 and 30 per cent in public sector wages and in pensions, trends which are being mirrored increasingly in the private sector. There will be even more hardship to come if the further €11.6bn cuts that the “troika” is demanding materialise.

Spain has done little of that so far and the pain will be felt increasingly in a country which has had one of the most generous welfare and unemployment benefits in the developed world.

So developments in Greece will remain important despite it only accounting for 2 per cent of Europe’s GDP. What happens in Athens moves the markets globally. The heads of the various parties are now household names in most parts of Europe. But we also now know clearly why Greece mattered so much. It is not because it is just such a thorn in the side of the Europeans. It is because Greece is a symptom of what was wrong with the concept of the single currency, which was one of joining together countries under a monetary union which were not in an “optimal currency area”.

After the euro introduction, the southern Europeans basked in a sea of cheap credit financed by banks in northern Europe. This allowed them to purchase at will from their neighbours, ignoring the need to improve their own productive capacity and competitiveness. While the going was good, structural reforms to ensure sustainable growth was forgotten, and when the financial crisis hit there was little to fall back on.

The sad truth is that with the eurozone malaise spreading, the measures so far to contain the contagion have been inadequate. The enormity of the task has been consistently underestimated. By imposing more austerity, prevaricating and going back on decisions already made, European leaders are in danger of sowing the seeds of the eurozone destruction.

Vicky Pryce is a City Economist. Her new book ‘Greekonomics’ is published by Biteback Publishing

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

SEN Teacher

Negotiable: Randstad Education Plymouth: SEN Jobs Available Devon

Infrastructure Lead, (Trading, VCE, Converged, Hyper V)

£600 - £900 per day: Harrington Starr: Infrastructure Lead, (Trading infrastru...

Software Solution Technician - Peterborough - up to £21,000

£20000 - £21000 per annum + Training: Ashdown Group: Graduate Software Solutio...

Supply teachers needed- Worthing!

£100 - £120 per day: Randstad Education Crawley: Supply teachers needed for va...

Day In a Page

Read Next
 

Daily catch-up: eurogloom, Ed in Red and Cameron's Wilsonian U-turn on control orders

John Rentoul
'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

'I’ll tell you what I would not serve - lamb and potatoes'

US ambassador hits out at stodgy British food
Radio Times female powerlist: A 'revolution' in TV gender roles

A 'revolution' in TV gender roles

Inside the Radio Times female powerlist
Endgame: James Frey's literary treasure hunt

James Frey's literary treasure hunt

Riddling trilogy could net you $3m
Fitbit: Because the tingle feels so good

Fitbit: Because the tingle feels so good

What David Sedaris learnt about the world from his fitness tracker
Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Second-holiest site in Islam attracts millions of pilgrims each year
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering