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.

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

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

Commercial Litigation Associate

Highly Attractive Package: Austen Lloyd: CITY - COMMERCIAL LITIGATION - GLOBAL...

Systems Manager - Dynamics AX

£65000 - £75000 per annum + Benefits: Progressive Recruitment: The client is a...

Service Delivery Manager (Software Development, Testing)

£40000 - £45000 per annum: Ashdown Group: A well-established software house ba...

Day In a Page

Read Next
The economy expanded by 0.8 per cent in the second quarter of 2014  

British economy: Government hails the latest GDP figures, but there is still room for skepticism over this 'glorious recovery'

Ben Chu
Comedy queen: Miranda Hart has said that she is excited about working on the new film  

There is no such thing as a middle-class laugh

David Lister
Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little