Greece produces a mere 2.6 percent of the Eurozone’s GDP but remains front and center in the Eurozone crisis and the larger debate over the proper role of austerity and government spending in resolving the West’s economic woes. Sunday night, Greek parliamentarians overwhelming accepted the latest round of painful cuts—a precondition to receive the next bailout of 130 billion Euros from the Troika of the European Commission, the European Central Bank, and the International Monetary Fund. While this latest cash infusion may forestall a messy Greek default in the near term, the country’s lack of competitiveness and likely inability to successfully implement these reforms will continue to cause problems for both Greece and the Eurozone writ large.
As I wrote last June, continued bouts of austerity and endless cuts to Greece’s social security system are neither strong enough to rebuild Greece’s creditworthiness nor helping build a foundation for future economic growth. Rather, these tax increases and drastic reductions in pensions and the minimum wage are eroding Greece’s already-weak social foundations.
One needs to look no further than the central squares of Athens, many of which are still burning, to see the reaction of a growing number of everyday people to the seemingly endless cuts. Facing an unemployment rate of over 20 percent, Greece is entering its fifth straight year of recession with no end in sight. With little alternative, many skilled and educated Greeks are emigrating. This, of course only compounds the problem further as those with the means and incomes to actually pay taxes are leaving the country in ever-greater numbers.
If the Europeans are serious about keeping Greece in the Eurozone and in the European Union, there are several steps they need to take immediately to demonstrate their resolve. First of all, German Chancellor Angela Merkel, European Commission President Jose Manuel Barroso, and others need to publicly thank the Greek parliament for taking yet another extraordinary step in passing this latest round of austerity. They should also thank the Greek people for accepting such draconian cuts with an admirable level of stoicism and understanding. Considering all of the cuts to their standard of living that they have endured, the protests in Athens and a few other major cities have actually been surprisingly limited.
Next, the Eurogroup meeting of eurozone finance ministers on Wednesday should quickly approve the next 130 billion Euro payment package. Continuing to debate and then reject each proposal put forth by the Greek national unity government is helping no one, least of all Greece itself. By standing boldly with their compatriots in Athens, EU officials could finally demonstrate the necessary solidarity to the markets who might then grant Greece the temporary reprieve it needs to fully implement these new measures.
Ultimately, the continued crisis in the Eurozone is based on politics, and the inability of Europe’s leaders to articulate a compelling vision that frames necessary cuts as part of a broad solution to a more prosperous future for Greece and for Europe. Merkel, French President Sarkozy, Greek Prime Minister Papademos, and others need to clearly explain to their citizens the many benefits of Eurozone membership—and demonstrate that the cuts being imposed on the Greek government are a necessary means to an end. Greece has clearly shown that you cannot simply cut your way out of a recession—cuts need to be combined with targeted investments in the future. Education, innovation, and infrastructure are obvious places to start, and labor market reforms which encourage competition are necessary as well. Leaders need to convince their people that short-term pain means long-term gains in terms of competitiveness, economic growth, and a return to the kind of standard of living that Greece and others have borrowed their way into financing over the past few decades.