Greece’s crisis without end?

The new Syriza government needs to focus as much on the regeneration of the competitiveness of the Greek economy as it does on immediate debt relief

Nick Williams and Tim VorleyIn one of the most closely watched European elections ever, the results are in from Greece.  Alexis Tsipras, leader of the left-wing anti-austerity Syriza party, has been sworn in as Prime Minister after forming a coalition with the right-of-centre (and also anti-austerity) ‘Independent Greeks’.  Jean Claude Juncker, Head of the European Commission, was quick to tweet his congratulations, emphasising of course that Europe stands ready to ‘continue assisting Greece in achieving goals’ of sustainable jobs and growth, while also ‘ensuring fiscal responsibility’.

The election outcome reflects an electorate frustrated by the austerity programme, falling incomes and high levels of unemployment.  Previous Prime Minister Antonis Samaras and his New Democracy party was unable to convince enough voters to continue on the path of austerity, while the neo-Nazi Golden Dawn party managed to come in third place, despite its leaders awaiting trial for organised crime and violence-related offences.  By seeking to tear up the EU austerity deal and write off the country’s debts to relieve Greece’s economic problems, Syriza has taken up a strong political position.  To many, with Greek debt at over 170% of GDP, higher than when Greece received a €100 billion bailout in 2010, and unemployment at more than 25%, sticking with the same path was simply not an option.  What happens next cannot but have a lasting, long-term impact on the political economy of both Greece and the EU.

Despite the talk of tearing up the debt, and factions within Syriza calling for a ditching of the euro in favour of a return to the drachma, as polling day approached the party’s stance softened somewhat.  It avoided talk of walking away from Greece’s debt, stating instead that it must be renegotiated.  Syriza’s economic spokesman, Yiannis Dragasakis, said specifically that the new government will not bring a ‘loaded gun’ to the negotiating table with the EU.   Syriza also insisted that it wanted Greece to remain a part of the Eurozone.  Talk of a ‘Grexit’ post-election has cooled, although it is still a possibility if Syriza does not achieve success in debt renegotiations.

Clearly, much depends on how the negotiations play out.  In some policy circles, there is some regret that Greece was admitted to the EU and the Eurozone.  As a consequence, with an anti-austerity government now in place that wants to renegotiate (which means cut) its debt, the EU may decide it wants Greece out.  Despite the problems in Greece, at present there is a fair amount of stability in the Eurozone.  The Troika may therefore want to use this opportunity to send a message to other anti-austerity parties which are on the rise in France and Spain and, by so doing, attempt to maintain stability.  This approach has very real dangers, however, and could set off speculative attacks on weaker members of the EU from financial markets; equally, a return to the drachma itself sets a dangerous precedent.  A more likely outcome is that there will be some recognition that the total burden of debt is too big to be serviced by Greek GDP and that, if concessions are not made, Greece will be reliant on an increasing flow of finance to plug fiscal gaps for a generation or more.  On the basis of this sort of thinking, the European Commission will sanction a write-off as the best means of keeping Greece in the Eurozone and the EU.

Understandably, much of the focus on Greece and the crisis has been, and remains, on the matter of how to deal with its debt.  Yet the debt will not be tackled simply through cutting public spending.  Policy makers must also seek to nurture an economy with the ability to grow so that the tax base can expand and incomes can rise.  In other words, in order to navigate out of the crisis, as well as deal with the debt, a longer-term programme of fostering competitiveness and productivity is required, something which austerity measures have so far stymied.

In a recently published paper we make the case that in order to improve long-term competitiveness Greece needs a greater policy focus on promoting entrepreneurship – specifically, entrepreneurship which is both economically and socially productive.  We argue that, prior to the crisis, policy has overlooked entrepreneurship.  Rules and regulations which allow productive entrepreneurship to emerge have been burdensome; while the prevailing culture of entrepreneurship in Greece has been weak, with many people not seeing it as an option for them.  In addition, we also show that Greece’s competitiveness was in decline long before the most recent post-2009 crisis.  Granted these are issues in many countries, but it meant that Greece entered the crisis with too little robust and resilient entrepreneurial activity.  Furthermore, as the crisis hit, many of the existing band of entrepreneurs left the country to make their living abroad.

Given the parlous fiscal constraints in Greece, there has been little room for policy flexibility.  As the state purse has shrunk, so too has financial support for entrepreneurs.  At the same time, as the government has sought to gather income where it can, taxes on business have increased, often in an ad hoc manner, which has in turn created further uncertainty as entrepreneurs have been unable to plan ahead adequately.  Our research highlights that this has had a number of negative consequences – with, for example more people moving abroad, more undertaking activities ‘off-the-books’ to shield income from the tax authorities, and more scaling back their ventures.  These consequences will have a real impact on the longer term competitiveness of Greece.

In sum, what happens next in Greece is far from certain.  No-one can pretend to see the future clearly.  Seemingly endless austerity has done nothing to improve the competitiveness of Greece, and that ultimately is what is required.  Maybe the best that can be hoped for is that EU and Greek policy makers do negotiate some kind of debt relief for Greece, but do so determined to think more broadly than they have done of late about the long-term competitiveness of the Greek economy.  Debt relief can perhaps provide some room for fiscal flexibility to develop policies aimed at fostering once more a competitive business base.  If not, there will not be the light at the end of the tunnel that Syriza currently proclaims and the Greek people will be travelling further down it for many more years to come.