EUC affiliated faculty Kostas Kourtikakis was interviewed by the University of Illinois News Bureau for its "A Minute With" series. Kourtikakis discussed the Greek economic crisis with News Bureau social sciences editor Craig Chamberlain. This article originally appeared on the News Bureau website.
First of all, what has been the mood in Greece about these developments?
There was an air of division and
animosity in the week leading up to the referendum. The climate reminded me of
a different era in Greek politics, which many Greeks of my generation had
considered to be a thing of the past.
Citizens were divided in two camps
that disagreed so much that even their understanding of what is at stake was
different. The members of the “no” camp, which included the current coalition
government, interpreted the referendum question literally. They were saying
“no” to the agreement proposed by Greece’s creditors on June 25, which the
government put on the ballot. Though some wanted a Greek exit from the
eurozone, I think that most did not. They only wanted a new agreement that
would involve less austerity and provide more stimulus for the economy.
On the other hand, the supporters of
the “yes” camp, which included most opposition parties, understood the question
more broadly, as a matter of whether or not Greece wanted to remain with the
euro. An underlying assumption was that Greece’s partners in the eurozone would
interpret the vote in the same way. Even though most people in the “yes” camp
also opposed austerity measures, they saw these measures as a necessary evil.
Despite any short-term costs associated with austerity, they saw eurozone
membership as yielding long-term benefits for the country, believing that
euro-related reforms make the economy more competitive and prosperous.
Editor’s note: To contact Kostas Kourtikakis, who is traveling in Europe until July 22, email kkourtik@illinois.edu.
Some news reports point out that even if Greece was borrowing and spending irresponsibly before its debt troubles, it has implemented the required austerity measures in recent years, cutting back government spending and raising taxes. But it’s also now in a deep recession, with unemployment at 25 percent. What are its options for digging out of this economic hole?
There are two main views about how
Greece can get out of this mess, which are roughly represented in the positions
of the two camps. Until now, the view promoted by the EU and the International
Monetary Fund, based in market-oriented policies, is that Greece needs to cut
public spending even more to reduce its debt. At the same time, the EU and the
IMF are asking for structural reforms that will revitalize business, which can
make up for the economic activity lost as the government sector shrinks. These
reforms include making the labor market more flexible, opening protected
products and services to competition, and reducing government corruption and
red tape. Further reform of the tax system is also considered absolutely
necessary, so the government can reap the benefits of economic growth through
tax revenues.
Yet there are experts who loudly
criticize the EU/IMF approach, among them prominent American economists Joseph
Stiglitz and Paul Krugman. The current Greek coalition government also belongs
in this group. They typically support structural reforms, but think that asking
a government to cut spending further during a period of prolonged recession is
counterproductive. They reason that with a reduction in salaries, pensions and
infrastructure spending, incomes then drop, private spending shrinks and market
activity stalls. As a result, government revenues in the form of taxes fall
even further, and the government finds itself even less able to service its
debt. The solution of these experts is economic stimulus, which means actually
increasing some forms of government spending or at the very least not reducing
it at all.
The EU has been dealing with debt issues for more than five years, and earlier on every new crisis seemed to threaten the entire international financial system. Is that still the case? What’s the worst that can happen if Greece were to leave the eurozone or default on its debts?
For the last five years, the
European Union has taken measures to protect its financial sector against a
“Grexit,” thus also protecting the international financial system, with which
it is closely linked. For example, most of the Greek debt has been transferred
from private institutions, such as commercial banks, to government entities,
such as the European Central Bank and the IMF. In fact, other eurozone
governments now own the biggest chunk of Greek bonds. Moreover, the EU has set
up a permanent bailout fund to assist weak eurozone economies that may need
support.
But despite the adoption of all
these measures, it is impossible to know for sure how well the financial system
is really protected, until Greece actually ever exits the eurozone. Moreover,
even though private institutions are now more secure, if Greece leaves the
eurozone and goes bankrupt, all the governments that own Greek bonds will
effectively lose the taxpayer money they now have invested in Greek debt. This
uncertainty gives pause to leaders in eurozone countries, some of whom are
otherwise tempted to cut Greece loose, because domestic public opinion is
turning increasingly hostile toward future Greek bailouts.
More than a few commentators suggest that the euro itself is as much, if not more, to blame for these ongoing debt issues. Can the EU and the eurozone continue in their current form?
There is a fundamental logic behind
the EU’s economic union, which has been designed as a decentralized union in
which each participating government is expected to follow certain common
economic rules. I think the current logic is not going to change soon, not only
because it will require a revision of the EU treaties, on which member-states
are extremely unlikely to agree, but also because there is no political will to
take the EU in this direction right now.
Yet, surprising as it may sound,
until the Greek crisis, the EU did not have effective mechanisms to deal with
situations like this in which the common rules are not enforced. In responding
to this crisis, the EU has been making all sorts of adjustments. One is the
establishment of the permanent bailout fund. Another is a new eurozone
agreement, dubbed as the “fiscal compact,” that makes common economic rules
strictly enforceable under national law. However, I don’t anticipate a
significant change in the rules-based nature of the entire system, at least not
in the foreseeable future.
Editor’s note: To contact Kostas Kourtikakis, who is traveling in Europe until July 22, email kkourtik@illinois.edu.
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