A Very Modern Greek Tragedy

Great concern has been raised in the UK by media focus on the growing government debt, making it a hot topic among the major political parties. Labour has been subjected to criticism for widening rather than lessening the gap when dealing with the economic crisis. But conversely economists have denounced the Conservatives’ proposals as draconian to the point of threatening to destabilise a fragile economic recovery. However Britain’s budget deficit is of less concern to the EU currently than that of Greece.

It is important to recognise that a budget deficit is not intrinsically evil and that many EU nations operate sustainably in constant deficit. This is especially true in times of economic resurgence as fiscal measures are employed to trigger a recovery. But Greece’s debt now stands at 13% of GDP, well above the acceptable 3% threshold laid down by the EU.

Recently the Greek government has unveiled a plan of spending cuts to shrink their budget deficit from 13% down to 3% in just 3 years. Alone this seems implausible but distrust still looms large in the EU since Greece doctored her figures to qualify for entry to the euro back in 2001. This combined with dubious figures that predict economic growth of 1.5% in an economy that shrank by 1.2% last year has seriously shaken EU member states’ confidence in Greece’s ability to redress her own deficit.

In addition to this, other pressures are exacerbating Greece’s economic situation. Over recent years falling competitiveness in international markets is leading Greek farmers to demand increasingly enormous crop subsidies of the government. And concern at the unsustainable acceleration of Greece’s growing deficit is making itself known as the demand for bonds moves elsewhere and Greece’s creditors take out record levels of insurance on their assets.

The greatest cause for concern is that Greece, should she default on her €55 billion debts, not only poses a threat to herself but also to other countries of the European Union. Informal talks have already begun about bailing Greece out but this is controversial since the Maastricht treaty actually forbids the EU from taking responsibility for ailing member countries’ economies. However fears over any knock-on effects, if Greece should default, seem to outweigh adherence to the treaty in many member states and methods of bypassing the treaty are possible. After all each state tied to the euro has a vested interest in protecting Greece’s economy. In addition to this, should the EU not uphold Greece’s economy, the International Monetary Fund may be obliged to intervene. This scenario would not only be embarrassing for the EU and call its authority into question but also any IMF recommendation would involve a change in interest rates which would conflict with EU, centrally controlled interest rates.

The history of Greece’s deficit and its root causes can be traced back to the founding of the EU. It was considered by creditors that the bill of any country that defaulted on its debts would be picked up by the other member countries in order to protect the whole. This is an unhealthy view to fertilise because it leads to over-confidence in a country. Lending to this country will increase above and beyond what they are truly able to afford and instability in creditors as their organisations become asset-heavy. Therefore it is in the EU’s economic interests to appear unlikely to bail Greece out in order to stop them from being extended more credit.

Despite all this, Greece’s predicament is not yet catastrophic. Economists have seen possibility for a self-motivated way out should she enforce tight fiscal cuts. But Greece’s government is notoriously malleable and lacking of the strictness required in enacting and enforcing such cuts. In addition the sudden jump in self-confessed Greek deficit figures from 6.7% of GDP to 12.7% in just one term suggests that Greece is still covering up her numbers meaning that the debt could be even greater than currently thought. Either way any help from the EU will dictate, among other things, that Greece is honest about her numbers in the future.