After a long negotiation over extending the bailout and its conditions, Greece has finally reached an agreement with the finance ministers of the euro area. The extension of the so-called “troika” (the European Commission, the International Monetary Fund and the European Central Bank) bailout plan has been accepted by the German Parliament. However, the agreement is just a temporary postponement of the problem by means of funding, and the whole process of negotiation between Greece and the European Union (EU) is but an ugly grimace that does not promise any good for further cooperation between the euro-zone countries and the euro area as a whole.
The confrontation between the new left-wing populist Greek government and EU institutions reminds me of a dispute between a loser son and his irritated father. The son complains that his father forces him to do his homework and doesn’t let him play outside with his friends. In addition to that, the son insists on getting his pocket money because whatever he received in the morning is already gone.
The economic situation in Greece is really bad, but not as a result of austerity or the reforms agreed with “the troika” in 2012, though the populist Greek government keeps suggesting the latter. If there were no agreement between Greece and the international authorities, the current bailout would expire this month and put Greece and its financial sector on the brink of bankruptcy. It is Greece’s unreformed and uncompetitive economy which is at the root of these problems. Greece has simply not done its homework.
As an illustration, Greece is the fourth bottom EU country in the World Bank Ease of Doing Business Index. According to the data, the overall tax burden on business and people is 50% (as compared with the EU average of 42%). Although Greece’s government spending declined by 18% in the period between 2009 and 2012, it still remains one of the highest in the EU as a percentage of GDP, standing at 59% and exceeding the expenditure of any of the Scandinavian countries. Even in terms of the expenditure per capita Greece is ahead of 13 EU countries including the three Baltic States.
Moreover, the minimum monthly wage in Greece is currently 684 euros and the ratio between the minimum and the average wages was around 49% in 2013, one of the highest in the EU. Despite that, the new government wants to raise the minimum wage to its pre-crisis level of 877 euros. This would increase the ratio to 60%, an unprecedented height in the EU. Given that the overall unemployment rate in Greece is around 30% and as high as 50% among young people, such an increase would be a catastrophe for the country’s economy.
Overly stringent employment regulations are another problem, and it seems that the new government wants to make them even worse instead of finding a solution. Greece’s employment regulations are even tighter than those in Lithuania. In terms of the labour market performance indicator of The Global Competitiveness Index, Greece is ranked 118 out of 144 countries. Instead of addressing one of the biggest problem areas, namely the inflexible wage regulations, the new government is set on reintroducing collective bargaining.
To continue the analogy, no matter how much effort the father (“the troika”) puts into explaining to his son the need to learn instead of fooling around (offering short-term populist solutions to the electorate), he would not listen but argue that he has already been preparing homework for the past three days without achieving any better grades. Such an attitude is reflected in The Global Competitiveness Index which shows Greece to be the least competitive of all 28 EU countries.
Greece was cornered during the negotiations and committed itself to continuing the reforms that had been agreed upon long ago: privatization of state-owned enterprises, abandoning plans to increase the monthly minimum wage, more effective tax collection, the introduction of a moderate collective wage bargaining mechanism and others. Lithuania is also anxious for Greece to carry on the reforms, primarily so that it does not become a bad example for Lithuanian politics.
So the agreement has brought Europe a sigh of relief, though not for long. The problem remains, with Greece’s persistently poor financial and economic situation which can only be improved by way of strict reforms and the country’s increased competitiveness. It is clear, however, that the Greeks do not understand the imperative need for the reforms. Nor are they ready to reform. With the external pressure of the EU and other international institutions being the only reason to institute reforms, it is hard to expect any breakthrough. And this is the key problem.
This time the father seems to have managed to discipline his son a little and the son will get down to his homework. However, it is obvious that without understanding its value and meaning, the son would not learn his lesson and will not miss a single opportunity to fool around.
The article was originally published here: http://en.llri.lt/news/economic-policy/general-economic-policy/vytautas-zukauskas-greeks-are-cornered-but-it-makes-europe-no-better/vytautas-zukauskas on March 5, 2015.