Reviewing the Greek Memorandum: Economic Grounds and Moral Obligations

The results of the Greek elections have seen the success of New Democracy and the formation of a Government keen to commit to the full implementation of the bailout programme with some minor revisions, possibly allowed by the Troika. However, besides expressing satisfaction for the outcome of the elections, EU leaders should recognise the need to review the broad policy strategy undertaken to cope with Greece’s sovereign debt crisis. After all, intransigence cannot be justified either in the light of the results delivered by the Plan so far, or on the basis of the main causes of the meltdown. In Greece the crisis originates from a double set of institutional flaws, both at national and at supra-national level. Nevertheless in the public debate there is a prevalent tendency to stress just the first dimension of the problem.

National institutional failures

In the last 20 years Greece can be regarded as a striking example of the crisis of representative democracy. The two main parties which have been alternating at ruling the country have built a system based on clienteles, vote-buying and tax fraud. This uncompetitive model has led to mounting public debt, huge and inefficient public sector.

Greek society has been unable to recognise the risks and the consequences of such a system and to perform a better control over the activities of their politicians. Nevertheless there is clear evidence that nowadays, in a complex, globalised and scarcely transparent environment, voters lack adequate democratic tools and technical knowledge to identify the right policy choices and to assess different political proposals. The narrow meaning of the word “democracy”, still merely enclosed in the concept of representative democracy, allows placid acceptance that citizens must bear the consequences of their own government’s conduct. Yet, this theory does not fully apply to Greece since the responsibilities for the current dramatic situation go beyond national borders.

Supranational institutional failures: the European Union’s structure and its policy responses to the crisis

A range of supranational institutional failures have exacerbated Greece’s woes. The incompleteness of the European Union’s structure has been strongly stressed in the debate. However, it is scarcely acknowledged that this condition massively weighs on the Greek economy and on those of the weakest Member States.

In addition, the mechanisms of surveillance put in place to secure the stability and the correct functioning of the EU have been proved insufficient and inaccurate. The Stability and Growth Pact completely ignored the external debt dimension and did not envisage any form of preventive or corrective mechanism for countries experiencing enormous current account deficit. Such myopia in macroeconomic supervision, common also in other international economic institutions, is comparable to the wrong policies made by Greek policy-makers, leaving aside their illegal conducts.

Unfortunately the set of institutional mistakes did not vanish once the crisis escalated. It is common opinion that a comprehensive and firm plan would have entailed minor costs both for Europe and Greece and would have minimised the risk of contagion for the other Member States. On the contrary, the response of EU leaders to the Greek crisis was extremely inconsistent as they started demonstrating reluctance and disagreement over the lines to take. The inability to agree upon a strong and credible strategy to face the crisis of such a small economy had a negative impact on market operators triggering reflections over the weaknesses of the EU structure. Most likely the lack of comprehensive actions was the first cause of contagion within the Euro-zone.

The design of the bailout programme has also been subjected to strong criticism. The need to cut the high fiscal deficit was clear and generally recognised, whereas the size of the adjustment has generated many doubts among experts. Despite massive discussions in the literature, no large debate over this critical topic took place within European institutions leading to the setting up of an unquestioned strategy based on very harsh fiscal consolidation.

The reduction in the deficit envisaged by the Plan amounted to almost 13% of GDP from 2010 to 2014. For the sake of comparison, the adjustment usually required by the Stability and Growth Pact in case of excessive deficit was 0.5% per year (i.e. 2.5% over a 5 years period). Furthermore, the targets of the bailout programme are set in nominal terms, meaning that they do not take into account cyclical conditions. The narrative justifying strong frontloaded fiscal consolidation was to ensure the credibility of the Plan by emphasising Greece’s commitment to reduce the budget deficit with the purpose of restoring confidence the markets. In contrast, the effort for credibility turned against Greece since market operators remained sceptical over the feasibility of such a huge and rapid adjustment. As a result Greek spreads never decreased towards sustainable level and continued to increase.

Negative predictions were indeed confirmed: the impact on GDP growth of the fiscal adjustment resulted to be much higher compared to the estimates of the bailout programme. GDP growth estimates were revised several times from -2.8% for 2011 and +1.1% for 2012 to -6.9% in 2011 and roughly -5% in 2012. Against this backdrop it is clear that the targets of the Programme are impossible to achieve and should be relaxed. Leaving aside counterfactual scenarios there is clear evidence that what many economists feared eventually materialised. Negative revisions in GDP growth, while keeping the deficit targets unchanged, imply additional cuts equal to 8.2% of GDP over the whole period. To achieve the 2014 deficit target Greece should commit to further 5.5% adjustment with respect to the first version of the Plan. This is why the programme is now considered socially unacceptable by the majority of Greek population and will have few possibilities to succeed.

Greek crisis and EU’s survival

Questioning the effectiveness of the current policy strategy has logically represented the dominant feature of the electoral debate in Greece. However, most of the European media have superficially converted this key discussion in a referendum pro/against Europe. Extremely simplified messages will never allow the European audience to understand crucial elements of key policy choices.

People’s confidence over the role of the EU has been equally damaged by daily statements of other EU governments’ members. By stressing Greece‘s own responsibility they have implicitly vindicating the “punitive” approach followed so far. In this respect European Institutions should act to temper sentiments of blame against single Member States and to preserve a spirit of solidarity and unity among European states.

An additional role of the European Union, as a supra-national institution, shall include sheltering citizens from institutional failures at national level, while maintaining a system of rules aimed at preventing moral hazard. Such responsibility has to be recognised in particular in the current crisis where supranational institutional flaws have exacerbated national errors. The need to minimise the impact of the crisis on European citizens, balancing this goal against other pragmatic considerations, can no longer be overlooked. This approach is crucial to consolidate European Union’s authority to ensure widespread acceptance of further transfers of sovereignty at European level, which seem unavoidable if we want that the path of European integration continue.

The author writes in a strictly personal capacity.