The Eurozone and the challenge of Greece

by George Hatjoullis

The present situation in Greece presents the eurozone and its representative institutions with a fundamental challenge. However, it is not the battle of wills or game-theory strategy that the media represents. It is not about the risk of default or contagion. It is not even about any existential threat to the euro that Greece leaving the eurozone might present. It is far more fundamental and pertains to the authority of the eurozone.

Authority is an odd word. It comes with connotations of power, force and obedience and that is what one will find in a dictionary definition. However, as any sensible parent knows, the key to authority is trust and respect. Once trust and respect are absent no amount power and force can sustain authority. The challenge that Greece is making is to the trust in, and respect for, the institutions of the eurozone and this challenge is being watched throughout all member states of the EU and indeed much of the rest of the world. Is the eurozone, and by implication the EU, an unyielding set of ‘rules’ and ‘agreements’ or is it an adaptive, thinking body, capable of recognising and correcting past mistakes and formulating new strategies?

The purpose of the original programme was to reform Greece and set it on path to economic health and make it capable of a self-sustaining role within the eurozone. The problems within the Greek economy were too a large extent self-inflicted and rooted in corruption, nepotism and tax evasion. A cultural cynicism pervaded much of Greek society (and quite a few other member states) that elevated the risk of moral hazard. Simply rescuing Greece through fiscal transfers, even if this were legal, would not have changed this cultural cynicism. A fundamental reform of Greek institutions and practices  was required and in this respect the initial firm Berlin stance was justified and quite necessary. Moreover, in one important respect this approach has been successful.

Today Greece has a government committed to reform. In particular it is committed to rooting out corruption,tax evasion and nepotism. It is a popular government that spans many traditional party political lines. The cultural cynicism in Greece has been broken and in a remarkably short space of time. Berlin, the architect of this change, is to be congratulated. However, having administered a necessary short, sharp, shock to gain attention, it is now necessary to ease back and show compassion and understanding. The shock has been overly painful and has fallen disproportionately on the weaker members of Greek society. It has crushed GDP, raised unemployment to ridiculous levels and left Greece with an even worse debt-to-GDP ratio than it had in the beginning. Greece has not been returned to economic health nor is it capable of a self-sustaining role within the eurozone. It is on the verge of falling out de facto if not formally. The stated objective of the programme has not been achieved and is unlikely to be achieved if Greece is required to continue on the present path. Change is required and this is really all that Syriza has said.

An adaptive and thinking institution will quickly recognise when a strategy is failing and the institution is moving away from its objectives. It will begin any necessary corrective change to resume the path to success. It will acknowledge any errors and omissions and move on. An institution capable of doing this will command the trust and respect of all those it represents and those external agencies with which it must deal. An institution that hides behind ‘rules’ and ‘agreements’ irrespective of the facts on the ground is doomed to failure. It may survive the first or even second strategic error but eventually its unyielding approach will prove to be its downfall. The challenge of Greece is in demonstrating that the eurozone and its institutions can sustain the trust and respect of its members and those agencies with which it deals.