June 30, 2011
Greece’s Parliament has just narrowly passed a €28 billion austerity package of tax increases and spending cuts: a necessary precondition for the European Union and the IMF to keep Greece on life support. So even with crushing unemployment, and the near-constant protests on the streets of Athens turning violent, Greece’s Socialist majority eked out a ‘yes’ vote for austerity. 

This was a bad idea. By comparing the fall of Greece to the fall of Lehman Brothers and declaring a vote of “no” to today’s austerity package as a vote for “national suicide”, European policymakers are playing a dangerous game of oversimplification and using scare tactics to get their way.

Leaving aside the overdramatic claim by Greece’s critics that a “no” vote would have dissolved the European Union, it would have been in Greece’s long-term interests to vote against this plan and stop the bleeding. Greece is experiencing an unprecedented economic depression, and its sovereign debt of over €350 billion make its eventual default almost a foregone conclusion. Perhaps it would be better to manage its default now by negotiating a responsible restructuring of its debt. Otherwise, the pain will be greater after yet another lifeline of over €120 billion from the EU and IMF is extended to Greece. 

Few economists believe Greece has much chance of being able to repay even its first loan, much less its second (especially given the draconian interest rates being forced upon Athens by decision makers in Brussels and Washington). Besides, conversations in the backrooms of the European Commission seem to have indicated that the idea of a Greek default next month would have ensured that Athens received the next tranche of its initial rescue package even if the Parliament had rejected this plan.

How did we get here? After years of fiscal mismanagement on behalf of the Greek government, consistently running huge deficits, failing to collect taxes from either individuals or corporations, and winning political support by offering unreasonable pension and salary benefits, Greece finds itself with among the highest debt-to-GDP ratios on earth. Brussels can hardly escape the blame either. If it had done proper due diligence of Greece’s finance, it would have never allowed Greece to join the Eurozone. While almost every country exaggerated its financial health in order to join the common currency, Greece’s excesses were by far the most obvious. 

Now Brussels is exacerbating the problems in Athens by insisting on austerity, right now, at all costs.

In reality, almost all of the measures voted on in today’s packages are worthy of passage on their own merits. Greece certainly needs to streamline its public sector and layoffs will clearly need to be a part of that. Taxes, especially on consumption and the wealthy, need to be raised. State-owned enterprises like the railroads, postal service, and large swaths of public lands can and should be sold to developers willing to modernize them. However, this is not the time to be inflicting more pain on a badly beaten Greek economy and society.

Priority should be given, instead, to the other proposed economic reforms including streamlining the process of starting a business, promoting entrepreneurship, removing barriers to foreign investment, and fighting rampant corruption. These are all reforms which enjoy broad support across the Greek political spectrum and, importantly, among the Greek population. All of the reforms will require political consensus to see through to implementation, as they are likely to span several years and several administrations.

Maybe history will prove otherwise, and this austerity package will prove to be the panacea that resolves Greece’s sovereign debt crisis once and for all. However, count me among the skeptics. Greece’s previous hard-hitting reforms, including raising the retirement age, slashing public salaries, and reducing its yearly deficit from 10% to 3% of GDP in a single year have so far proved insufficient to promote market confidence in Greece, or even prevent the need for a 2nd or even an eventual 3rd bailout. Why will this time be any different?

Prolonging Greece’s inevitable default might prove to be the biggest Greek tragedy of all.

Garrett Workman is the assistant director of the Council's Global Business & Economics Program.

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