January 14, 2016.
A fiscal look at Greece in gridlock.
Left behind in a whirlwind of blood, sweat and tears Greece peaks its head above a gloomy mist of debt and austerity to pose the question we’ve all been asking; why?
Crippling effects of the 2008 financial disaster may feel out of sight as the recent refugee crisis dominates headlines, but it is not out of mind for the Greek economy.
The great Greek-catastrophe took laurels on the podium of disaster after the financial collapse of Wall Street in 2008. With global markets lingering on edge, Greece announced in October 2009 that it had been covering up its deficits for years – cue the sirens of global doubt.
However, Greece was not alone in the economic casualties. By its side stood Spain, Ireland and Portugal – the four were lumped together as countries in danger of losing economic parity with the European Union. Coined by Dr. Reiner Martin, financier of EU Cohesion Policy at the Central and Eastern European Bank, they became known as the “Cohesion Countries.”
As a reaction to the crisis, the EU allocated funds to member states in the Eurozone with lower economic productivity. For those in danger of drowning in a larger European economy, these funds were meant to act as temporary flotation devices.As a reaction to the crisis, the EU allocated funds to member states in the Eurozone with lower economic productivity. For those in danger of drowning in a larger European economy, these funds were meant to act as temporary flotation devices.
EU packaged funds existed prior to 2008, however, they were not nearly as effective as they needed to be. Due to this, the EU attempted to revitalize the “Cohesion Countries,” through multiple integrated steps, as well as two rescue plans known as The European Financial Stability Facility (EFSF)
and The European Stability Mechanism (ESM).
So, the question remains: Why is Greece still drowning after
wn an economic life preserver? The answer, though not simple, may be that life preserver funds only managed to keep Greece afloat in a sea of dysfunctional economic policies.
The surge of EU Funds
To fully understand how these funds are supposed to work, it is important to consider the main EU objective.
Dating back to the Lisbon Treaty – a friendlier time, before a
sense of crisis kicked in – the highly structured Regional Policy, later to become integrated with the Cohesion Policy, was put into place. This legislative policy was designed to ease the entrance of new EU members with low Gross Domestic Product (GDP) – a device needed for the hard to predict future of a growing union. The policy also sought to change procedures and enhance the competence of regional development throughout the EU.
The Cohesion fund is an important financing mechanism in the EU and currently looks to invest roughly €351.8 billion into European regions, cities and economies, according to the European Union. The policy is part of a larger push for Europe2020, a list of goals which include: job growth, climate change, energy dependence, reducing poverty and social exclusion.
“We have the decision to use Cohesion Policy in order to achieve more goals than in the past,” George Andreou, Professor of Political Sciences at Aristotle University of Thessaloniki, Greece, said.
“The traditional goal of promoting convergence between countries, [lies within] the linkage between the Lisbon, Cohesion and Europe2020, and since the crisis, there is the new linkage between Cohesion and the economic gap,” Andreou explains.
However, in a post-economic crisis world, where Greek’s surrender to the truth turned out to be more harmful than beneficial, EU funds for sustainment were limited. The old regional development funds set in place were unable to extend as far as they needed to.
“So you see, you now have less money in order to do more things,” Andreou said.
Therefore, through the finance of insurance bonds and other debt instruments in the capital market, the EFSF was created in 2010 as a temporary crisis resolution mechanism. The idea was to implement a fund that would provide necessary financial assistance to Ireland, Portugal and Greece.
In October 2012, the ESM, a fund with a more permanent rescue mechanism, was created to provide further support. Currently, the ESM is the sole deputy in charge of responding to financial assistance from member states in the Eurozone area.
The tale of Ireland and Greece
To properly answer “why” Greece is still treading in deep water, it is important to consider alternate answers to a similar problem.
One example that has been analyzed by economists is the distinction between Ireland and Greece.
Interest is primarily focused on Ireland being seen as a sibling to Greece in terms of the financial crisis, yet a stranger in terms of survival.
The two countries were in equally desperate financial situations after the 2008 global crisis hit. The EU, using the reforms, policies and funds described above threw life preservers to both Ireland and Greece in the hopes of aiding their dwindling economies.
Prior to the collapse, Ireland was the poster child of aid and reform; part of the second-best success story in Europe, according to Richard Pine, Irish columnist on Greek affairs and author of “Greece through Irish Eyes.”
Pine notes that in more ways than not, Ireland and Greece are very similar to one another. He suggests that (in the past) they both “overspend, overindulge, exaggerate [and are] overconfident. Each on the rim of a fragile Europe and an even more fragile euro-zone, each proud of its independence from the age-old dominant neighbor and proud of its historic contribution to European culture.” (Greece Through Irish Eyes, Pine)
Common plight aside, Pine points out that after the crash, politicians from the two countries could not get far enough away from each other, arguing that “Greece is not Ireland” and “Ireland is not Greece” – both avoiding the inevitable spectrum of financial failure beating down on them.
From an economic perspective, George Saravelos, Head of European Foreign Exchange strategy at the Deutsche Bank, has examined how these two countries differ in “The Success of the EU Cohesion Policy: The Case of Greece and Ireland.”
In particular, his study focuses on how EU transfers of structural funds have affected the economic performance of Greece and Ireland. Saravelos’ findings suggest that one reason the Irish economy was more successful was because the structural fund investments actually resulted in faster growth of Ireland’s economy, allowing them the resources necessary to move forward and pay back their debt.
“The funds prevented the occurrence of supply-side bottlenecks in the economy and the increased demand for human and physical capital channelled structural funds to effective use.” (Saravelos, 3rd Hellenic Observatory PhD Symposium)
Professor Andreou believes that timing, as well as unique cultural and governmental differences play a crucial role in the outcomes of these two countries.
“Success of the Irish government came from integrating development programs that tried to implement more concrete goals in harmony with the wider policy implementations, Andreou said. “Where as in Greece, we do not have such consistency and continuity.”
Similarly, Saravelos argues that the Greek structural investments were not made at a favorable time with the conditions of growth and as a result lowered potential benefits of the funding.
Greece in the spotlight
These circumstances did not arise from an unlucky roll of the rescue dice. Unsteady cultural and economic conditions in Greece predate the 2008 collapse of the global economy; thus, altering effects of the allocated EU funds.
However, joining the EU and adopting the Euro was supposed to be an end all solution in eradicating Greece’s financial instability. So what happened?
Maria Spyraki, Greek Member of the European Parliament and political journalist, believes that during this time, growth restoration was more difficult for the Greek economy and it therefore “spiraled in a financial crisis by draining every single last euro from its market.”
The discord between reality and the falsified financial situation in Greece, arose due to something known as the “gray economy” – a major player in the unsteady financial game that is Greece.
According to Steven Hill’s article “What’s wrong- and Right -with Greece,” this kind of economy centers around familiar networks, notably leading to nepotism, behind the door deals and tax negligence – this perhaps turns out to be the most important difference between the two tales of Ireland and Greece.
Spyraki notes that it is necessary to consider that European Structural and Investment funds have helped spur projects and job creation in Greece. However, she states “distortions in the public administration have been transfused to the lifecycle of the co-financed projects, thus limiting their positive impact in the real economy.”
In 2010, Greece received the cold shoulder from the financial market. This put Greece on a path headed directly for bankruptcy and the potential ignition of a new financial crisis.
Bailout bonds issued through the International Monetary Fund (IMF), as well as the European Central Bank and Commission, were the first of two international bailouts that would eventually total more than €250 billion.
Attached to these bonds were harsh austerity terms that would later swallow Greece whole in the global game of money control.
The post-economic crisis world is far less empathetic than its precursor and Greece’s failures, which arose from attempts to solve original problems, have added an element of doubt to the dangerously mirky waters.
However, the stark comparisons between the Greek and Irish stories also allow us to search for new solutions.
Andreou believes that although it is difficult to assess the position of Greece in the future, change needs to start on a smaller, rather than larger, scale.
“I think that if there was a solution in response to the crisis, it would need to come from a domestic level. Unfortunately the EU collective does not have the power, or even the will I think, to directly influence things in Greece,” Andreou said.
Greece’s standstill suggests that the torturous efforts to avoid default are about more than just economics, cultural identity and geopolitics are also greatly at stake.
A country’s identity, or lack thereof, has a major impact on its wellbeing. Without recognition of this relationship there is a lack of accountability when it comes to connecting national actions with consequences, such as debt or inflation.
The political and economic efforts initiated in the EU to help save Greece requires Greek society to be open to change if it wants to swim its way out of the swirling currents of economic crisis.