The road to economic recovery will be an uphill battle strewn with major economic hurdles
By Constantine Passaris, Professor of Economics, University of New Brunswick
RHODES, Greece/ Troy Media/ – Fishermen around the world have an expression: it’s time to cut bait and start fishing. Clearly the contemporary leadership of the European Union (EU) are not even amateur fishermen.
The EU leaders’ summit last weekend was billed as decision time for the financial issues plaguing Greece. That did not happen. Instead the leaders decided to postpone making a final decision and continue to negotiate on the details for a new rescue package for Greece.
The weekend agreement included the harshest austerity measures ever proposed for a third bailout for Greece. These include taxation increases, additional pension curbs and a requirement that the Greek parliament legislate these conditions. The deal was silent in regard to special measures to address the sustainability of Greece’s public debt, running at 177 per cent of the country’s debt-to-GDP ratio.
The summit also revealed two major fault lines in the EU. The first is that the EU’s economic governance architecture is ineffective. Second, there is an urgent need to arrive at a definitive conclusion if Greece should remain within the euro zone area that uses a single currency.
The word Grexit was recently introduced into the English vocabulary to capture the possibility of the exit of Greece from the EU. This outcome is considered a high possibility as a result of the economic crisis and the ever-present threat of financial collapse.
The prolonged economic recession in Greece has lasted for more than five years and has contributed catastrophic consequences on every metric of economic performance. Furthermore, it has also produced an emotional rollercoaster of missed bailout deadlines, massive financial defaults, personal economic hardship and dashed hopes.
What is lost in all the noise from the demonstrations and the political posturing is that the EU’s founding fathers had anticipated a large number of European countries eagerly applying for membership in the EU. In consequence, they designed a checklist of necessary conditions and stringent requirements for eligibility.
What they did not foresee is that a country, after securing membership in the EU, would opt to terminate its association with that union or having the EU evict a member country because of fiscal mismanagement. Neither scenario is addressed in the EU constitution.
The consequences of a Grexit have been dismissed by some EU leaders as inconsequential. The Greek GDP is only 2 per cent of the EU GDP and a paltry 0.39 per cent of the world GDP.
In my opinion, this is a significant error in judgement. We are living in the new global economy of the 21st century, where economic globalization, financial integration and global supply chain patterns have defined a new set of economic rules of engagement.
It is unreasonable to expect that the economic demise of one country will be contained solely within its national borders. In fact, the aftershocks and ripple effects of such an outcome can have worldwide consequences. Economic contagion is a modern threat that has reared its ugly head as a result of the globalized world we live in. Consider the dramatic slide in stock markets around the world during the last few weeks that were triggered by Greece’s current economic malaise and uncertain future.
A Grexit would inevitably mean that Greece would exit from the single monetary currency of the euro zone and adopt the Greek drachma. Indeed, pensioners who have been hard hit by the bailout agreements and foreign imposed austerity measures fondly remember the good old days when the drachma was Greece’s currency.
The return to the drachma may be more of a sentimental crush than a financial panacea. Even if Greece were to discard the euro and adopt the drachma, there will be no happy ending for Greece’s financial woes and the road to economic recovery will be an uphill battle strewn with major economic hurdles.
Dr. Constantine Passaris is in Greece as a visiting professor at the International Writers Center of Rhodes (Greece). He is also an Onassis Foundation Fellow (Greece), a national research affiliate of the Prentice Institute for Global Population and Economy at the University of Lethbridge and a Professor of Economics at the University of New Brunswick.
Source: Troy Media