Back in the hot days of July 2011, European leaders demanded austerity from Greece, but also agreed on a Greek haircut, or PSI to create some relief. In addition, they were warming up for a “Marshall plan” for Greece. Perhaps the leaders were excited towards their August vacations. The phrase “Marshall plan” has disappeared with the winter. Without some kind of hope for growth, the Greek recession will continue to deepen, and this will continue weighing on the euro.
The original “Marshall Plan” was for Germany, now the master of the EU. The US and its allies learned the lesson of post WWI that led to the horrors of WWII and tried a different approach of recovering Germany. This was also part of the Cold War effort.
The success was huge, and Germany became a strong and prosperous democracy. It’s very hard to compare the cases, yet Greece is certainly in economic ruins.
The Hellenic Republic closed 2011 by losing 7% of its economy. This is certainly not the first year of “negative growth”. This is an outright depression.
Everybody Shares the Blame
Greece has itself to blame for cheating its way into the euro zone, easy pension schemes and high corruption. The EU certainly shares the blame for mishandling the current crisis.
Also Germany and France, the core of the EU, violated the Maastricht treaty, and have higher than required debt levels. Together with an undervalued currency for these two countries, this enabled stronger growth in the years prior to the financial crisis.
Two sides to the equation
Greece has a super high debt-to-GDP ratio. It’s debt is larger than its economic output for a long time. The current program projects a return to a ratio of 120% in 2020.
As there are two sides to blame for the debt crisis, there are two sides to the debt-to-GDP ratio. There’s no doubt that the EU is tackling the debt side. Job cuts, wage cuts and other means trim spending. Privatization and higher tax try to increase income.
But some of these steps are counterproductive and just curb growth. Without growth, there is less tax revenue, and then new austerity measures are required. This is a bottomless hole.
There are some steps that are supposed to encourage future growth: reforms in labour markets for example.
This is certainly not enough, and not only because of slow Greek implementation.
A Marshall Plan for Greece means investment in the debt struck country. Investments can create jobs, increase consumption, increase tax revenue and increase hope – a virtuous cycle instead of a vicious one.
Greeks are seeing only pain and no gain. EU investment in Greece can also change their hostile and understandable attitude towards the EU, and especially Germany.
Showing Greece the Door
In recent weeks, there’s a growing feeling that the EU doesn’t want Greece in the euro-zone anymore. This can be seen in
- The demand to fix the small hole of 325 million euros.
- The demand that leaders pre commit to their actions after the elections.
- The idea to impose a commissioner on Greece.
- The idea of using an escrow account for the bailout,
- The idea of approving only a bridge loan now and more funds later and the list goes on.
The most important part missing is a recovery plan for Greece: a Marshall Plan.
Germany and France might feel confident now. The indirect QE by the ECB managed to stabilise banks and also lower the bond yields of “too big to fail” countries such as Spain and Italy. The shock absorbers are in place.
The high level of uncertainty is weighing heavily on the euro. But even if Greece is kicked out and all the banks stay on their feet, the lack of any growth plans will continue wrecking havoc.
Portugal will probably need a second bailout program. The EU considers a fine for Spain for not meeting requirements.
Letting Greece go in order to deter other countries to comply might work and trigger full compliance, yet the this may be a Pyrrhic victory – the growth through austerity paradigm had little success so far. More austerity without growth will just open more bottomless pits and put pressure on the euro.
A weaker euro certainly helped German growth. Perhaps they want to keep it low.
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