An overview of the four dimensions of the Greek Crisis

2011-07-06

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The Greek crisis is the result of many flaws Image Source: ibtimes.com

In analyzing the effects of the global economic crisis on the European Union and particularly on Greece I have come to realize that the current crisis has four dimensions which are worth putting up together into a single article for the sake of fully understanding the issue and for having a single piece of reference. In short those dimensions are first and foremost the global economic crisis, the systemic flaws of the euro, the endogenous factors that made the internalization of the crisis very severe and last the nature of the policies to deal with the crisis.

The first dimension of the crisis in Greece is the global economic crisis, since some of the most badly hit industries in this crisis were the shipping and tourism industries both of which are fields where Greece had allocated much of its resources.

The second dimension is the European level of the crisis, where a number of flaws in the EU architecture have themselves created inefficiencies and diverging paths in the economies of member-states. The EU has many structural problems, ranging from its multi-dimensional cumbersome bureaucracy which makes it impossible to take swift action and this is a serious flaw when time can determine the difference between failure and success, to the inefficient and to some extend irrational use of community funds, with the Common Agricultural Policy (CAP) being an example of policies that a state should never adopt (I find it insane and obscene that under the current form of the CAP Queen Elizabeth II is the top recipient of “agricultural subsidies”).

Adding to this are the structural flaws of the single currency, which lacks a coordinated European fiscal policy in order to be effective, plus it lacks the most important of policies when it comes to balanced regional growth and convergence of local economies: that is a mechanism that would redistribute the surpluses that are accumulated within the euro area.

Furthermore the very nature of the monetary policy of the European Central Bank (ECB) is from the outset problematic (the one-size-fits-all logic). It aims at tackling inflation, but this is done in a near-dogmatic way that is occasionally detrimental for member states, if those are in need of liquidity. In the latest press conference of the ECB chairman, Jean Claude Juncker, this was made clear once again, through the intention of the ECB to further increase interest rates. In a period where half the eurozone needs cheap money to cope with the burdens of the crisis, an increase in the price of money (because that is what higher interest rates do) is catastrophic.

The third dimension is the collection of endogenous factors that have brought Greece on the verge of default. I am pretty much sure that those are the ones that certain media prefer to promote so as to depict Greece as the sole responsible for what is going on. At any rate, Greece has a huge trade deficit, meaning that it imports more than it exports (three times more in fact). It has an immense public sector, which is costly and unproductive. It has the most complicated bureaucracy in Europe, which makes foreign investment very difficult. It lacks an effective tax collection mechanism. Also certain classes of people have enjoyed outrageous benefits over the years, like retiring at their early or mid 50s’. Moreover the agricultural sector in the country, was devastated and massively reduced, thanks to the lack of any serious national plan for agricultural growth and due to the malinvestment of European funds. These and many others are factors that make an economy malfunctional and unable to grow.

The fourth dimension of the crisis, is the measures that are taken to combat it. I am referring to the adoption of massive austerity measures that amid the crisis only succeed in worsening the recession. At the point where Greece is today a default is inevitable, leading a reasonable person to conclude that since this is inevitable then let it come sooner rather than later, as in the future the crisis in the real economy will be even worse and the downward spiral will in fact be a vicious cycle to doom and to decades of third-worldliness and under-development (for more on this see video of David Harvey about the Greek crisis).

I have already elaborated on the way in which the bailout to Greece works, but it is worth repeating that the bailouts do not aim at preventing default, but at postponing it, so as to buy precious time that will allow for reforms and preemptive measures in the countries that are directly or indirectly affected by a default in Greece. Furthermore the bailouts are a very effective way of indirectly financing private banks who still have liquidity problems despite the bailouts that they received from their national governments when the financial crisis first hit. Those private banks are mostly German and French who hold a considerable amount of the Greek (and not only) debt.

Bringing this overview of the four dimensions of the Greek crisis to a conclusion, I would like to say that to deal with the current situation all four facets of the crisis need to be addressed simultaneously and in parallel, which is extremely difficult to do, if not impossible. However there is no other way out of it. Failing to tackle any of these four, means complete failure from the outset. Unfortunately our leaders, national and European seem to fail at more than one of the aforementioned dimensions of the economic crisis in Greece.