By Paolo von Schirach
August 5, 2012
WASHINGTON – I have often observed that the euro, the currency currently shared by 17 of the 27 members of the European Union, (EU), was born with a fundamental birth defect. It was assumed that all the countries that would adopt the Euro would operate according to the same (mandated) strict rules of fiscal responsibility. It was naively assumed that all members would take their treaty obligations seriously. It was also assumed that, on top of their willingness to play by the rules, all countries adopting the euro as their currency had the economic and financial means to do so.
North and South have nothing in common
Well, this was a gigantic leap of faith, as the still unfolding EU debt crisis shows. In Europe there are the Northern countries whose finances are more or less alright and whose economies are strong enough to provide the necessary revenue to keep governments running. And then there is the Southern periphery, now ironically dubbed ”Club Med”, that lives in a different universe. These countries’ public sectors are bloated and inefficient. Their welfare and entitlement systems are structurally out of sync with revenue, while their non competitive economies sputter, generating little revenue.
Debt leading to insolvency
Hence piles of debt. And now debt has become so huge that there is legitimate fear of insolvency. Greece is virtually bankrupt, Spain may be next. Italy is in slightly better shape; although there are serious doubts about the ability to reduce its gigantic debt while reforming public administration and adopting serious pro-growth policies. All this would have to happen in a country with confused and fractious politics, huge inefficiencies, a weak economy and rampant corruption, at the moment run by a technocratic government of experts with no political mandate.
How can Southern Europe get out of this mess? It could only if it could have at the same time manageable austerity and workable pro-growth policies. Draconian austerity alone will not do. It will kill the patient. But there has to be an inflection in public spending. At the same time these economies need to grow.
Greece does not keep its word
Well, it seems that none of this will happen. A recent report on Greece in The Economist, (Promises, promises, August 4- 10, 2012), provides a chilling and depressing account of how Greece failed to meet most of the conditions that its governments negotiated with its EU-ECB- IMF rescuers.
The Greeks have passed, but not fully implemented, only some of the reforms they had committed to put in place: 100 out of 300. Moreover, the government is now trying to renegotiate with its EU-ECB-IMF lenders and stretch reforms over 4 years as opposed to the agreed upon 2 years.
Privatizations proceed very, very slowly. This year target in terms of revenue raised will be missed by a wide margin: 300 million Euro as opposed to 3 billion planned. The tax authority has not been reformed. Public sector jobs have not been cut. And corruption still dominates public policy.
Firing civil servants adds to unemployment
Look, to some extent it is understandable that the coalition government led by Prime Minister Antonis Samars of New Democracy wants to delay cutting public programs and public employment. Lacking private sector growth, it is obvious that out of a job public servants will simply add to an already disastrous unemployment rate, essentially adding misery to misery.
Still, this systemic disregard for solemn commitments and obligations confirms what I have stated in earlier pieces. These are unserious governing elites making policy in societies still deeply in denial about their predicament and unwilling to get serious about work and productivity. I suspect this ailment to be terminal.
Reconfigure the monetary union: weak countries out
If this is indeed so, then forget about this rescue package to be followed by the next and focus instead on restructuring the monetary union itself. As complicated and painful as the exit of the weak members may be, (many have stated that it is impossible, as it would bring about global financial chaos), the notion that Northern Europe will keep paying the bills of an irresponsible South –essentially for ever– does not make any sense.Print This Post