Lessons From Athens

Of all the European Union’s (EU) 27 member states, none could match Greece’s fiery opposition to the International Monetary Fund (IMF), seen as the hated agent of American imperialism and global capitalism. On May Day, tens of thousands of protesters chanted “Hands off our rights! IMF and EU Commission out!” in the streets of Athens. But the very next day, their socialist government signed on the dotted line of a €110-billion bailout deal with the IMF and Eurozone members.


When the details of the loan’s stringent conditions become known, Athens could erupt in even greater protest. What is already clear is that the harsh belt-tightening coming its way would leave the country poorer and struggling for years, if not decades. If the deal holds, the crippling rise in the cost of borrowing may ease but with Standard & Poor downgrading Greek bonds to junk status, there will be no rush of investors to Athens.


It is a far cry from the glitzy days of the 2004 Athens Olympics, when Greece celebrated its status as a global star, a member of the Eurozone where foreign funds poured in.


The dramatic reversal in Greece’s fortunes tells a familiar story of the risks of riding the wave of globalisation without a firm hand on the till. The same global liquidity that can fuel growth can also evaporate at any moment, especially if the market loses confidence in the national management.


Ever since Greece abandoned its drachma and embraced the Euro in 2002, tourism has boomed, its shipping industry benefited from rising global commerce, and funds have poured in to finance the government’s construction boom and its budget deficit.


As a condition of its joining Europe’s single currency, Greece was supposed to keep its budget deficit below 3 per cent of GDP; like other Mediterranean members, however, it merrily ignored that rule. Far from encouraging discipline, membership of the Eurozone tended to remove any urgency for fiscal restraint. Greece embraced moral hazard with both hands, assuming it would receive support from wealthier members who would be more concerned than Athens about the weakening of the Euro.


The Greek government’s profligacy saw it fund its bloated, often idle and corrupt, bureaucracy with high salaries and benefits while failing to collect taxes from its citizens, especially the rich. In recent months, the budget deficit ballooned to nearly 14 per cent of GDP and the national debt as percentage of GDP rose to 115 per cent. As the crisis of 2008 shook the world financial system, destroying its appetite for lending, the Greeks were hit hard. The years of living beyond their means led to increased scrutiny from a wary bond market, whose concern for Greece’s viability rose steadily as Eurozone members dithered about whether and how to help Athens. Facing domestic opposition to bailing out the profligate Greeks, Germany’s Angela Merkel agonised whether to cut Greece loose or to set a dangerous precedent of bailing other debt-addicted members. Asking the IMF to step in was a huge loss of face for the Union, and an especially bitter pill for the socialist government of Greece. But the choice, as finance minister George Papaconstantinou admitted, became a stark one “between collapse or salvation”.


The discipline that the European Union never managed to enforce is finally being shoved down Greece’s throat as a condition for the bailout. Greece has committed to cutting its budget deficit to less than 3 per cent of GDP by 2014 and to stabilise its public debt at about 140 per cent of GDP. This will require laying off tens of thousands of workers, ending bonus payments for public sector workers, freezing salaries and pensions, sharply raising consumption taxes and collection, and punishing tax dodgers.


The coming weeks will show whether citizens accustomed to fat Greek government are prepared to accept the “great sacrifices” that their prime minister has called for. The Greeks will have to choose whether to pay the price for their continued membership of the Euro club and the global financial system, or to get off the globalisation train. If their failure to live up to austerity commitments leads to a Greek default, the impact would not be confined to Athens alone. As the bond market will likely flee other vulnerable Eurozone member countries, the Euro will take punishing blows, crippling the financial world and global trade.