Dr. Ludger Schuknecht, Chief Economist at the German Finance Ministry
In the public debate over the right way forward for Greece, we have often seen balance and moderation fall by the wayside – and not just among the usual indignant voices on Twitter. Even leading economists at times appear to forget what constitutes the foundations of European growth and prosperity. Both the EU and the monetary union are a community of values that stands for stability, solidarity, and working together on an equal footing.
Governments that can pay the bills are a precondition for economic growth
First, stability. Stability in particular plays a key role as a precondition for prosperity. It is rightly enshrined in the European treaties as a guiding principle of our economic system. Maintaining price stability is the central mandate of the European Central Bank. And the objective of the Stability and Growth Pact is to secure sound public finances. For this reason, the International Monetary Fund’s chief economist, Olivier Blanchard, was right when he expressed his support for the reforms and consolidation measures agreed upon by Greece, Europe and the IMF by writing in an IMF blog post that “Fiscal austerity was not a choice but a necessity”. Efficient governments that can pay their bills are an essential precondition for economic growth. Only then can they provide a good regulatory framework for businesses and ensure that their citizens enjoy essentials like a good education.
Nevertheless, some leading economists are calling this correlation into question. For example, the plan for Greece to achieve a medium-term primary surplus of 3.5% is described by U.S. economist and Nobel laureate Paul Krugman as "destructive austerity" and “monstrous folly”.
But the fact is that many countries – including the Netherlands, Belgium and Italy – have achieved this target before. And it would appear to be at least somewhat over the top when an illustrious group that includes the renowned economists Thomas Piketty and Jeffrey Sachs claims in an open letter to Angela Merkel that “right now, the Greek government is being asked to put a gun to its head and pull the trigger”.
Second, solidarity. Europeans are often criticised for exhibiting a lack of solidarity. Yet solidarity is not just a key component of Europe’s political order – it is something that we put into practice on a daily basis. In fact, the largest portion of the EU’s current €1 trillion (!) budget for the period from 2014 to 2020 is targeted towards projects to support less-favoured regions and certain economic sectors. When one takes a closer look at the payments made to Greece, Portugal and some eastern European countries in recent years, it turns out that financial redistribution within Europe – as a share of GDP – is often equal to or even greater than levels of redistribution within Germany.
Ireland, Portugal, Spain and Cyprus are on the right track
Appeals to European solidarity are directed in particular towards the issue of Greek debt. For example, in his 18 July essay for the Süddeutsche Zeitung, Jeffrey Sachs recalls the relief that Germany was granted following the Second World War. And in a 2 July interview with Die Zeit, Joseph Stiglitz declares that Greece should “receive real assistance for a change”. These and other leading economists forget that, by providing Greece with favourable financing conditions and long repayment periods over several decades, Europe has already made significant concessions (of easily up to 50%, depending on the method of calculation). Furthermore, Greece’s debt servicing costs are extremely low - in fact, Portugal, Ireland and Italy pay more to service their debt.
In an article published in Die Welt on 30 June, Barry Eichengreen is quoted as criticising the "incompetence" of the Greek government. But, he argues, this incompetence pales in comparison with that of its creditors. Joseph Stiglitz, in Die Zeit on 2 July, is even harsher in his criticism of the creditors’ rescue programmes, which in his view “worsened the 2010 crisis” and “caused misery”. This judgement is peculiar in light of the successful (and essentially similar) programmes carried out in other European countries that required assistance packages. Ireland, Portugal, Spain and Cyprus are on the right track: government finances are on the mend, competitiveness is recovering, growth has returned, and jobs are being created.
And wasn’t Greece on the right track too in late 2014, according to all of the forecasts by international organizations? Greece had carried out most of the fiscal consolidation that was necessary. It had enhanced its competitiveness, and its economy was growing again. If anything is threatening to push Greece into a state of chaos, it is not because of too little debt relief or too much austerity.
Europe must strive to resist supposedly simple solutions
The most important achievement of the adjustment programmes that other countries have carried out successfully is the new self-confidence they have gained, along with the restoration of their “good reputation”. And this brings me to my third point: the principle of a working together on an equal footing. To ensure a strong and stable Europe, we have to coexist and cooperate on an equal footing, both politically and economically. This has succeeded everywhere except for Greece. Permanent dependence is demeaning. If a country is not capable of standing sustainably on its own feet, it will have a hard time functioning as a political and economic equal. If a country is unable over the long term to provide its young people with opportunities for employment and personal development because it lacks competitiveness and is dependent on fiscal transfers, then dissatisfaction, strife and anti-European resentment are unavoidable.
For this reason, the only way for Greece to get back on track towards economic success, and thus to return to a level playing field with its partners, is to carry out a successful and decisive programme of reforms. To this end, Europe and Germany will continue to reach out to Greece. But this path also requires determined reforms.
My favourite myth from Greek antiquity is from the Odyssey, where the beguiling song of the sirens lures listeners to their own destruction. To resist the sirens’ song, Odysseus had himself tied to the mast to ensure that his ship would stay on course. Europe must strive to resist supposedly simple solutions and false prophets. Success in Europe – based on stability, solidarity and cooperation on an equal footing – requires us to stay on course too.
This article first appeared on the Süddeutsche Zeitung website www.sueddeutsche.de on 22 July 2015.