Greece: a culprit or victim of Euro Dream?

On 5^th July, the people of Greece, in a historic referendum, spoke laude and clear against the austerity program proposed by the Euro club. The gloves are off on both sides. On one side, Greece, the quasi bankrupt nation, stands; and, the other side of the fence is being represented by the Euro club headed by Germany.  On July 8^th the Greek prime minister made an emotional but audacious statement: “his country has become a laboratory for austerity experiments”.

But later the Greek government, seeing no option in hand, went on to negotiate for the third bailout plan. For the moment, the probability of Grexit from Euro appears to have slightly diminished but it’s still on the table. Needless to say that if Grexit happens then its aftermath will bring a chilling effect on the global economy, and more importantly that would shake the foundation of belief that if globalization can really be an engine of growth and prosperity for a longer period of time.

Greece was escorted to enter the Euro club in 2001; and in almost one and half decades the country’s financial mess brought it at the threshold of exiting the common currency zone. Can Greece alone be held responsible for its economic mess or at larger canvas is it the nature of the operation of Euro that merits more critical examination?

Greek tale of quasi divorce from Euro

EU (European Union) was first a political union which wanted to bind the competing European nations with a single thread of common market. To get this project done, they conceived a single currency, Euro, to make business easier for all.

In order to be eligible to join the Euro club, the aspiring country had to satisfy the Maastricht criteria    based upon economic indicators; ex: interest rate, the ratio of debt vis-à-vis their GDP rates etc. Those rules were framed to keep a comfortable balance in fiscal and monetary policies amongst all the Euro members. In 2001, just to secure an entry into the Euro zone, Greece manipulated the fiscal record since it was a mandatory requirement to have the ratio of debt versus GDP as 60%.

In the early phase of its circulation, the Euro went on swiftly with certain negligible hiccups. With having a common currency in floating, countries like Germany, France became natural and primary beneficiary of booming economy. Because for these already developed countries, entire Europe had become a single market for their export goods. Secondly, they’d a highly efficient taxation system in place which allowed them to keep a safe balance between public expenditure and public purse. That helped countries like Germany and France to keep their debt within a limit.

Relatively moderately developed nations of Euro group (ex: Ireland, Portugal, Greece etc.) could not milk out much out of common market; on the contrary,  as their manufacturing industry is not as robust as Germany and France. Thus, the latter became the natural exporter to the former.  So, the level of earning for public exchequer didn’t get pumped up for countries like Ireland, Portugal and Greece; on the other hand, their welfare state expenditure remained flying high with the same vigor. To finance those welfare programs they never felt any dearth of credit as German, French banks were ready to lend them without any hesitation.

In 2009 with the credit crunch crisis hitting the European continent, the entire business of fiscal and monetary affair got measurably disturbed. European banks themselves experienced a massive credit dearth. For countries like Greece, Ireland, Portugal, borrowing became tougher; though their public expenditure remained high, but lending refused to slacken. Such credit poor countries did not have any option left but to knock at the door of ECB (European Central Bank) and IMF. The request turned into bailout package with the imposition of tough austerity measures which includes heavy cut in public expenditure and radical reforms in taxation policy.

We can’t deny the fact that Greeks do not have an efficient system for taxation; nor, do have they a robust financial system either. So, it was a pre-established fact that underperforming Greece would not be able to pay back its debt. But still the bailout package was offered to them from EU. People say that it was given just because it allowed them to pay back to German and French banks. So, the first and second bailouts were delivered not to ease the problem of poor Greeks but to re-pay the debts to the German and French financial firms. And, ultimately the burden of that payment falls over the Greek, German and French taxpayers.

The debt is a necessary evil of capitalism. But letting public debt go beyond an uncontrollable limit squarely depends upon the fiscal infrastructure of a country where Greece has lost the game. But, let’s not feel so squeamish because if today it’s Greece, tomorrow it’d for Ireland, Portugal and day after tomorrow Italy and Spain might be found floating in the same troubles waters. Not even that, the economists fear that if this trend of insurmountable debt (vis-à-vis their respective GDP) continues then even France might fall in that lap. If all these countries will slip in the darkness of austerity then who will buy German goods?

The nub of the story is not that Germany, through Euro, wants to become more powerful in compare to its eternal competitor France or other European neighbors; but the crux of the Greek crisis lies in asking an economically literate question which is: does the Euro itself have a flawed structure?  

Euro, an enigmatic experiment of single monetary union floating with multiple fiscal policies:

Euro circulates in seventeen countries. Most of these countries have got a very different culture of economic management. Well, the fundamental mistake that the planners of Euro made was that they could not anticipate the future. They thought that if all the seventeen countries have democracy and free-market economics; it means they all share the same culture which is Europeanism. Founding fathers of Euro overestimated the power of Adam Smith’s invisible hands (the efficiency of market) and underestimated the weakness of human nature (which is greed to have more). As the classical liberals believe that market solves all problems itself; and the state should not at all come in the way of market. So, the failure of Euro exposes the limit of free-market. Today, Adam Smith’s invisible hands could not be found to be visible in Euro zone.

It’s, seemingly, an impractical politico-economic project that seventeen sovereign nations could surrender themselves to a single currency which means a single monetary tool with seventeen different fiscal policies. The fact of the matter is that the nations in Euro zone are not homogenous in nature of development and prosperity. A few countries from western part are highly advanced economies will continue to prosper; their banking institutions will continue to dominate other parts of Europe. Thus, the level playing field will never surface. And, the game of rules will always be dictated by a few mightier ones (primarily Germany then France).  

If European leaders wish Euro to continue as their common currency then they’d have to consider adopting a common fiscal policy. That means it requires a complete federal structure: the idea of United States of Europe has to evolve not merely in nomenclature but in operational terms as well. What it means is that every Euro nation has to cede its complete sovereignty to Brussels. But, that innovative technology of power will, technically, alter the concept of nation-state.  It’ll trigger a new philosophical question that if any nation would ever like to be ruled by a state whose sovereignty would not stay in its capital but far away in Brussels. And, if this solution does not appear doable then the survival of Euro remains, beyond doubt, questionable.