The Greek Moment: Facing the Reality
The cradle of democracy has spoken and Greece has a new government. Voters chose a party whose platform promised a more desirable future. However, like elections everywhere, promises and simplistic solutions to complex problems made during a campaign seldom survive post election realities. For Greece, an exit would devote attention away from fixing its most pressing problems. The ‘must do' options require investment in education, infrastructure, and technology in order to expand the economy.
The cradle of democracy has spoken and Greece has a new government. Voters chose a party whose platform promised a more desirable future. However, like elections everywhere, promises and simplistic solutions to complex problems made during a campaign seldom survive the post election realities.
The reality is that the new government has inherited problems and governance deficiencies that represent a significant national security threat to the country. The financial difficulties are affecting nearly every aspect of the economy but unfortunately have a disproportionate impact on the middle class and less well off. As a member of the EU and NATO, Greece should be afforded compassion and support as it attempts to recover from its financial troubles. The evidence of outside support for Greece is real and continues to evolve. The European Commission, the European Central Bank, and the International Monetary Fund provided financial bailout assistance, coming to Greece's aid in the early days of the country's financial crisis.
In retrospect, aspects of the troika's bailout plan are arguably less than ideal. However, at the time, the situation was dire and concerns of a global depression not experienced since the 1930's were causing panic. Greece was not alone in its troubles. Portugal, Ireland, Spain, Italy, and Cyprus all had serious financial issues. Concerns that Greece would be the first domino to fall were real. In review, two things should not be lost, the fact that the troika bailout was a genuine response to a Greece in crisis, and most importantly, the crisis in Greece was brought about by government mismanagement, corruption, income tax evasion, and other issues caused by weak institutions.
As the euphoria of the Syriza party's election subsides, the new government must begin its process of governing by accurately assessing its options and dealing with the cold hard facts of reality. Today, the option of an exit from the euro zone, commonly referred to as a "Grexit", is less alarming than it was two years ago, but it should not be considered lightly. The European Union is much better positioned to withstand and recover from it. Greece holds only 3.5% of the euro zone debt; however, the risk of becoming a precedent for others is at play.
For Greece, an exit would waste precious resources and devote attention away from fixing its most pressing problems. A Grexit could upset what looks to be the beginnings of a positive glide path to recovery. Current data indicates that Greece's financial situation has slightly improved. Its over-spending has been brought under control and positive movement in reducing the size of the public sector is being realized. By the end of 2014, the Greek economy began showing signs of recovery with a positive growth rate of 0.8%. This was in comparison to the GDP shrinkage of 29.6% following the breakout of the crisis. In addition to the above, recent poll data from Euro barometer indicates 72% of Greeks want to stay in the common currency area.
Although financial numbers have improved, Greece is still suffering from a crushing debt burden of 175% of its GDP. To move forward, the new government must focus on improving several key enablers. It must deal with burdensome regulations, dysfunctional institutions, and an inefficient government bureaucracy that continues to foster corruption. Greece's lack of competitiveness is one of the most pressing issues impacting the country's future.
The austerity measures to fix the country's finances and the aggressive increase in taxes should have been accompanied by efforts aimed at formalizing the economy. According to the Global Competitiveness Report, the Greek economy remains the least competitive in the EU, ranking 81st out of 148 economies surveyed. It also ranks among the worst in the EU for tax evasion and is tied in last place among the most corrupt countries in the EU. Its informal economy is the second largest among the OECD countries accounting for 24 percent of the country's GDP. According to Global Financial Integrity, the Greek economy lost USD 261 billion to corruption, tax evasion, and crime in the period 2003-2011.
By the same token, political instability has been accompanying Greece since the breakout of the crisis. Uncertainty has rendered the Greek markets insecure, dissuading foreign and domestic investment. In 2010, when the country was stuck in a political stalemate, Greece could only attract USD 30 per capita of foreign investment. As Greece's crisis continues, serious foreign investors are likely to wait on the sidelines hoping for lower priced assets.
Greece needs qualitative foreign investment to offset its extremely low gross national savings rate. Political stability and a government focused on creating a favorable business climate is a priority. The ‘must do' options require investment in education, infrastructure, and technology in order to expand the economy.
In the past, Greek governments temporarily bought their way out of problems with borrowed money. In any scenario, this option hardly exists. In a world of limited and costly options, addressing the internal structural issues that caused Greece's current dilemma may prove to be the most cost effective and prudent investment option. Time is of essence.
Dr. Valbona Zeneli is a professor of security studies and deputy director of the Central and Southeast European Program at the George C. Marshall European Center for Security Studies.
Joseph W. Vann consults on national security issues. He is a former professor of national security studies at the Marshall Center.
The views presented are those of the authors and do not necessarily represent the views of Department of Defense or its Components.
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