All we ask is that Europe give Greece a chance

17/3/2015

By Yannis Dragasakis*

We risk condemning an entire generation to a future without hope, writes Yannis Dragasakis

It is a common belief that the Greek government is seeking special treatment relative to other stressed eurozone members. We are not; we are seeking equal treatment.

Since the onset of the crisis, our economy has shrunk 26 per cent; unemployment has risen from 8 to 26 per cent; and wages have declined 33 per cent. These outcomes are worse than those experienced by any country during the 1930s and far worse than those projected under the two Greek adjustment programmes. This is why the Greek government has criticised these programmes.

Our fiscal adjustment has been larger than in other countries. Since 2009, spending cuts and tax increases amounting to more than 45 per cent of household disposable income have been implemented. In Portugal it was 20 per cent; in Italy and Ireland 15 per cent.

Not only have the fiscal measures been larger, but for each percentage point of consolidation, the economy has contracted more. This is because the Greek economy is less open than others; any decline in demand hits domestically produced goods more than imports. Successive rounds of austerity exacerbated the contraction in gross domestic product. And with that the ratio of debt-to-GDP rises, making debt dynamics unmanageable. Greece is borrowing ever more to pay back earlier debts.

We entered the crisis with a large external deficit. With inflation close to zero, the cuts in relative prices required to lift competitiveness came at a high cost for stressed eurozone countries. Output had to contract, generating deflation and worsening the debt dynamics. Large debts are hard to stabilise when deflation increases the real value of debt. In the 1920s, the UK ran large primary fiscal surpluses, yet deflation increased its debt-to-GDP ratio.

While the crisis has made matters worse for Greece and others, it has had unintended — but positive — consequences for “core” eurozone countries. Germany and others have benefited from exchange and interest rates that are lower than they would have faced had they still had their own currencies.

The European Central Bank’s securities market purchase programme aimed to reduce the cost of borrowing of stressed countries by buying their sovereign debt. It also essentially eliminated the Greek debt held by banks in the core. Greek banks, however, continued to hold large amounts of that debt and the cost of restructuring had to be paid by the Greek taxpayer.

Capital flows from stressed countries have drained liquidity from their banking systems while increasing the lending capacity of the banks in the core. The exodus of skilled labour has diminished the productive capacity of the stressed countries. The effects of this will take a generation or more to reverse.

The euro’s progenitors envisaged a monetary union resembling the classical gold standard, under which adjustment between countries with external surpluses and those with external deficits was symmetric. Under the euro, the burden of adjustment rests on deficit countries. Between 2008 and 2014, the external balances of the stressed countries have swung from huge deficits to surpluses. The external surpluses of the core are unchanged.

As a result, the country is in a position like that of Sisyphus — a man condemned to roll a boulder to the top of a hill, only to see it roll down again. Greeks have implemented austerity and have suffered much more than expected. Many of the 60 per cent of young people out of work will one day be reclassified as long-term unemployed. We risk condemning an entire generation to a future without hope. To avoid that, what we ask from our eurozone partners is to treat Greece as an equal and help us escape from this Sisyphean trap.

*The writer is the deputy prime minister of Greece. Yanis Varoufakis, finance minister, and Euclid Tsakalotos, minister for international economic affairs, are co-authors.

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