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22 April 2024

Greek crisis highlights EU's basic, structural flaws


European leaders have vowed to keep Greece from slipping into a financial chasm, but none of them has said how the worst collective crisis in the history of the eurozone can be fully resolved.

Market pressure in reaction to massive Greek deficit and crushing debt is bearing down on other eurozone countries, forcing governments to sort out their finances and get the 16-nation bloc into better balance.

The answer seems simple at first - raise tax revenues, cut spending and get growth back on track to reduce deficits and debt in line with the European Union's Stability and Growth Pact. A leading economist has warned, however, that the debate should not be dominated by "deficit fetishism" because draconian measures can check economic growth. Other experts highlight basic, structural flaws that the EU might not be able to resolve.

Greece, Ireland, Portugal and Spain have pledged to meet the pact's goals – public deficit of no more than three per cent of output and debt of no more than 60 per cent – within the next few years.

Whether or not officials from Athens to Dublin succeed could decide the fate of Europe's most ambitious undertaking ever.

How will governments raise more money?

Special fuel levies, raising social charges or taxes, closing loopholes and clamping down on fraud, installing highway tolls and privatising assets are ideas officials have come up with. Economic growth would also boost tax revenues while reducing the amount of money being paid out in unemployment benefits.

How else could authorities cut spending?

Freeze or reduce public sector wages, let workers retire without replacing them, cut health services, pay less into pension funds and raise the retirement age, or ditch plans to build airports or high-speed rail networks. But Greek civil servants, including tax collectors, promptly staged strikes and promised to trash such austerity plans.

Should officials cut deficits and adopt austerity measures?

"The crisis has brought home to politicians that they have to reduce their budget deficits considerably in the next few years, otherwise the next crisis is only a matter of time," Commerzbank economist Ralph Solveen said.

But Columbia University professor and Nobel prize-winning economist Joseph Stiglitz has warned: "I would give a strong cautionary note against deficit fetishism".

Asian austerity measures a decade ago did not work as hoped, Stiglitz stressed, and efforts being tried now by Ireland might hobble growth in gross domestic product.

Citigroup Global Markets analysts said: "As the Irish experience suggests, tightening fiscal policy may generate such negative effects on the GDP and revenue growth rates that the deficit could remain high, despite policymakers' efforts."

Should richer eurozone countries support the others?

Some economists say countries like Germany, often seen as a model of fiscal discipline, should focus less on trade surpluses at the expense of neighbours and more on boosting consumption and investment.

"|Key to the future stability of the eurozone is that German domestic demand improves and the country imports from other eurozone members so that trade imbalances within the single currency diminish," said Howard Archer, senior economist at IHS Global insight.

What could be done at the eurozone level?

"Policymakers should focus on redesigning the Stability and Growth

Pact, which has been a spectacular failure, to replace it with something

tougher and more enforceable," with each nation giving up some sovereignty, according to UniCredit chief economist Marco Annunziata.

"We urgently need deeper and broader surveillance of economic policies," EU Monetary Affairs Commissioner Olli Rehn added.

But as ING senior economist Carsten Brzeski noted: "Hardly any government wants to give the EU more instruments because next time around it could be them, sitting in the dock."

Natixis economists Sylvain Broyer and Costa Brunner have floated a eurozone fiscal model based on Germany's that "would require harmonisation of tax rates and a political statement supporting equal standards of living in the European Monetary Union".

Harmonised tax proposals have been shot down several times already however, and Stiglitz urged the EU to simply create an emergency fund to help out member states when they get into trouble.

At present, "there is no established support mechanism – partly because this was not supposed to happen", Annunziata noted in the Wall Street Journal.

Governments were supposed to gradually bring their economies into line with one another but Archer warned that fault lines were instead spreading across Europe and said a failure to act "would threaten the very existence of the eurozone in its current makeup".

Getting Germans and some others to swallow bailouts of countries tarred as freeloaders is far from guaranteed, however.

Frank Schaeffler, deputy finance spokesman for the liberal FDP party, told German lawmakers during a discussion of the situation in Greece: "We don't help an alcoholic by giving him another bottle of schnapps."


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