The Periphery’s Purgatory
Mareeg.com-ATHENS – German Chancellor Angela Merkel’s upcoming visit to Athens will be a far
less tense affair than her earlier journeys here during Europe’s long financial
crisis. Of course, Greeks have little love for Merkel; but, thanks to Europe’s
modest economic recovery, some of the poison has been drawn from Germany’s relations
with Europe’s most damaged and distressed economies.
Indeed, Europe is no longer considered a risk to global financial stability. The
eurozone’s core economies are showing signs of revival, and financial conditions in
the over-indebted periphery are improving as well. But, given capital shortages,
depressed demand, and the slow pace of reform in the eurozone periphery, continued
progress is far from certain.
In the eurozone economies that were hit hardest by the global economic crisis, the
output and employment losses have been huge and persistent. Real
(inflation-adjusted) per capita income in the eurozone as a whole hovers around its
2007 level; in Greece and Italy, however, it has sunk to the levels recorded in 2000
and 1997, respectively.
Meanwhile, the eurozone’s overall unemployment rate is 12%, and it is much higher in
the periphery. In Spain, more than 25% of the labor force is jobless, while Italy’s
youth unemployment rate stands at 42%. In Greece, where the overall unemployment
rate has climbed to 28%, some 60% of the country’s young people are unemployed.
Recovering from such crippling employment losses will not be easy, and will require
a speedy return to high and sustainable growth rates.
Consider Greece, where the government is planning a return to the capital markets in
the coming months to finance the country’s long-term borrowing needs, even though
securing such financing would require paying unsustainably high interest rates. The
fact that the government seems willing to do so translates clearly its desire to
move beyond the influence of the “troika” (the International Monetary Fund, the
European Commission, and the European Central Bank).
Indeed, since 2008, Greece’s GDP has shrunk by almost 25%. Recovering lost capacity
will require large amounts of capital, but there are five reasons why such financing
is unlikely, under present conditions, to be forthcoming:
· As a result of austerity, public investment as a share of GDP continues to
fall and has now reached a record low. Having already committed substantial rescue
funds, eurozone authorities do not seem inclined to inject fresh capital.
· Sources of domestic private capital are limited, because the recession and
the related near-collapse of asset prices, along with a sharp increase in taxation –
particularly on high incomes and on capital – significantly weakened balance
· Bank lending has slowed drastically, as a result of Greek banks
effectively defaulting in the wake of the troika-imposed losses on sovereign
creditors and the nationalization of the country’s banks. A record-low level of
deposits and the recession-related rise of non-performing loans have weakened Greek
banks’ capital position further. (Today, companies in the eurozone periphery borrow
at substantially higher rates than their counterparts in the core. For bank loans,
the ratio is almost two to one; for long-term financing, it may reach as high as ten
· Greece’s unsustainable debt position is discouraging foreign private
investment. The assumptions about primary surpluses, private-sector involvement, and
GDP growth underlying the government’s commitment to reduce its debt level, which
currently exceeds 170% of GDP, to 124% of GDP by 2020 cannot be realized, given
Germany’s opposition to restructuring the official financing that replaced the
defaulted private loans. Some easing of loan conditionality – via extended
maturities and reduced interest rates ‒ will be agreed later this year, but it will
not be enough to calm fears of a new default.
· Trust between foreign and Greek investors is lacking, and it will not be
restored until debt sustainability is achieved. But Germany and the other core
eurozone countries consistently block any proposal that contemplates debt
mutualization or fiscal union. Ideas such as Eurobonds, a single European finance
ministry, and increased capitalization of Europe’s common rescue funds (the European
Stability Mechanism and the Single Resolution Mechanism) are not even being
Along with inadequate capital supply, Greece is suffering from a demand shortfall,
as the troika continues to squeeze the country with harsh austerity. If these
policies are not relaxed or offset by more expansionary policies in the eurozone
core, demand will remain depressed, discouraging further investment.
Finally, on the reform front, time is running out. For the last few years, rather
than confronting the special interests – state-protected businesses, public-sector
trade unions, and lobbies – that inhibit reform, Greece has spread its economic
misery horizontally through blanket spending cuts. Reforms such as privatizing
state-owned enterprises, opening up closed professions, abolishing restrictive
business practices, and reducing the size of the public sector have been undertaken
very slowly and inefficiently, and they will not significantly alter growth
As it stands, Greece is unlikely to meet the recovery challenge – and other
peripheral economies will probably falter, too. Sufficient reforms and capital are
lacking, while the social rifts resulting from austerity increase the risk of
potentially devastating political instability. With the European Parliament election
approaching, the prospect of populist anti-austerity parties prevailing in the
periphery – and of anti-euro, anti-bailout parties gaining power in the core –
heightens the risk of instability even more.
Should financial turbulence return and herald a new eurozone crisis, the monetary
union’s sustainability will again be called into question. To prevent this outcome,
Greece and the eurozone’s other peripheral economies must limit austerity, buttress
demand, undertake reform, increase investment support, and pursue fiscal union.
Unfortunately, these keys to ensuring a cohesive and prosperous eurozone are likely
to be left unturned – until, perhaps, the next crisis occurs.
Yannos Papantoniou, Greece’s former Minister of Economy and Finance, is
President of the Center for Progressive Policy Research.
Copyright: Project Syndicate