The failure to reach an agreement in Greece is because from the start the diagnosis has been wrong. So in the end, the patient got sicker. And today wants to stop being treated. This sorry tale is an immense failure of the EU.
As Yanis Varoufakis has been repeating from the beginning, Greece did not have a liquidity crisis but a solvency crisis. The latter was caused by a ‘competitiveness’ crisis, made worse by the financial crisis. And this kind of crisis cannot be fixed by cuts and more cuts but only by a serious investment strategy, accompanied by serious not token reforms (e.g. to how the State, and hence also the taxation system, is run) to bring back competitiveness. The real cure.
Instead, pretending Greece only has a liquidity crisis, has meant focusing too much on the short-term debt payments and crippling austerity conditions for receiving more credit, which in the future cannot be paid if competitiveness and growth do not return. And they will not return if Greece cannot invest. A never ending vicious cycle.
Indeed, it’s impossible to have a monetary union with such different levels of competitiveness. The problem is that there has not been a serious understanding of why and how these competitiveness differences arose. While it is correct to emphasise the much needed reforms to tax collection, and changing the pension age to one that is more in line with the rest of Europe, there has been too much emphasis on what needed to be thrown out (the various ‘inefficiencies’), and zero emphasis on what had to be constructed. As in Italy, the emphasis has been on reducing pensions, reducing public sector pay, reducing labour market rigidities (a euphemism for workers’ rights!) with the assumption that getting rid of inefficiencies, will make growth automatically occur. But nothing could be farther from the truth. Much has to be constructed, not only eliminated, and until this is done Greece will go nowhere. And the debt/GDP ratio will rise, due to zero growth in the denominator, even if the deficit (the growth in the numerator) remains low.
The conditions of the bailout therefore should have been conditions that emulate the kind of public sector reform and investment strategy that characterizes many of the competitive powerhouses of Northern Europe—including Germany! Indeed, Greece should not do what Germany says it does (austerity), but what Germany actually does (invest)!
While many criticize Germany for not investing enough, the truth is that over the last decades, Germany has invested in all the key areas that not only increase productivity, but also (and especially) create innovation led growth. Companies like Siemens, which win procurement contracts in the UK, are the results of a dynamic public-private eco-system in Germany, with high government spending on science-industry links (Fraunhofer institutes, whose budget is 10x that of their equivalents even in the UK), the existence of a large and strategic public bank (KfW) that provides patient, long-term committed capital to German businesses, a long-run focused stakeholder type of corporate governance (rather than the short-termist, shareholder Anglo-Saxon model which Southern Europe has copied), an above average R&D/GDP ratio (rather than the way below average one in Greece, Portugal and Italy), investments in vocational training and human capital, and a mission oriented ‘energiewende’ strategy focused on greening the entire economy.
Imagine the very different types of result (‘compromise’) we would have witnessed had the negotiations been about stuffing an investment strategy down Greece’s throat, rather than more cuts. Ok, we will bail you out, but reform your country, and kick-start public investments (of the type named above), so that you are ready for the 2020 innovation challenge!
Instead, insisting on the status quo full of more austerity, produced an increasingly weaker Greece, more unemployment and more loss of competitiveness. The real German medicine should have been provided…not the ideological one. And lets not forget what many have been repeating: 60% of Germany’s debts were cancelled after the Second World War. This is of course another example of Germany having benefitted from one medicine but prescribing a different course for everyone else.
It is also true that Greece HAS swallowed the medicine over these last painful months, but gotten very little credit for it. It has brought down its deficit, reduced the number of public employees, and reduced the pension age. Had it been given some breathing room, more could have been done.
If Greece does exit, the only hope is that Varoufakis’ insistence on a European wide investment programme, will at least find a national solution. Perhaps it can begin with Greece forming a development bank like the KfW (which unlike in Italy is funded directly by the Treasury), and using it to kick-start the kind of long term investment strategy in Greece that should have been part of this ‘pact’ from the start.
Italy must learn the right lessons from this Greek tragedy. Italy’s competitiveness is nearly as bad as that of Greece—and until now it has had very little serious investment strategy. Some token measures on education (with no serious net increase in long-run investment), cuts to the public sector, and an emphasis on what workers must give up. So if Grexit now happens—and Europe does not finally get a proper doctor in the room–get ready for Itexit over the next year.
Tags: Eurozone, Greece, Innovation Policy