This was written for a class in my MPA/ID program. It is meant to be written during the height of the Eurozone crisis in 2011.
In many ways, the vast challenges in the road ahead for Greece in the aftermath of its ongoing sovereign debt crisis resembles one of Greece’s most famous stories, featuring one its most famous heroes, in its storied mythical literature – the Labors of Hercules. Like Greece, Hercules suffered a crisis; driven mad by Hera, wife of Zeus, Hercules killed his six sons and wife. The case of Greece is not so murderous, certainly. In the Greek case, driven “mad” by low borrowing rates, at just 20 basis points over German borrowing rates as a result of being a member of the Eurozone, Greece’s government debt levels rose to approximately 130% to GDP in 2010.
Following his crisis, Hercules traveled to Delphi to inquire how he could atone for his actions. There, the Oracle of Delphi advised him to reside at Tyrins and serve King Eurystheus for twelve years, performing whatever labor that the King might ask of him. And thus, began the twelve labors of Hercules. Similarly, Greece “traveled” to the troika – consisting of the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) – to “atone” for its actions. There, the troika advised Greece to undertake the IMF’s macroeconomic adjustment program, which is essentially, first, a combination of increases in taxes and cuts in government spending (fondly known in some quarters as austerity measures) to provide the requisite primary surplus to finance its massive piles of debt and, second, a broad combination of structural reforms to the economy to boost consumption, investment and exports.
The macroeconomic adjustment will be painful to the people of Greece. Benefits will have to be cut, public sector hiring will have to be frozen, social security measures will have to be reduced, wages will have to be cut. Yet, much like the labors of Hercules, I believe these labors will have to be undertaken. There are other paths that Greece could take, certainly. For one, it could choose simply to exit the Eurozone and return to the Drachma, the equivalent of Hercules going into exile completely. Next, it could undertake a radical debt reduction, which could help it absolve some of the pain that comes with immediate austerity measures. But, vis-à-vis the macroeconomic program of the troika, none of these other paths will induce the Greeks to focus on what is arguably the key long-term problem of the Greek economy which is the need for Greece to make structural adjustments to its economy to boost its long-term competitiveness.
Greece was on an unsustainable economic path leading up to the crisis. At end 2010, debt levels had grown to 130% of GDP, the government fiscal deficit was at -15.7% of GDP, the current account deficit was at -12.8% of GDP and the unemployment rate stood at 14.5%. From a competitiveness standpoint, Greece suffers from a low initial level of labor productivity which, combined with a rapid growth in unit labor costs, led to a real effective exchange rate appreciation of approximately 30% between 2001 and 2008. Furthermore, Greece is the worstperforming European country in measures of “doing business.” Given these problems, only a committed and sustained structural reform can help Greece in the long-term. The macroeconomic adjustments that the troika, essentially, enforces onto Greece will go some ways in reducing Greece’s debt levels though, admittedly, the path to adjustment will be long and arduous. Yet, if it means reforming public finances such that Greece can transition into a sustainable growth path over the long-term, it is a labor worth undertaking.
It is not clear that, sans external pressures from the troika, the Greek government would automatically undertake such macroeconomic adjustments and structural reforms. It could leave the Eurozone and devalue to the Drachma, but that only boosts its competitiveness in the short run. But what matters for long-term competitiveness is really the productivity of the economy, not exchange rate competitiveness. According to the Atlas of Economic Complexity, Greece’s main exports are refined petroleum oils, packaged medicaments and fish, which are not particularly high value-added activities. Greece will need to shift towards more high value-added export activities, which requires a productivity boost. If Greece is not forced, externally, to really focus on giving itself the opportunity to generate long-term productivity-driven growth against the backdrop of a sound fiscal environment, it may end up remaining stagnant in a quagmire of debt, deficit and a weak economy indefinitely.
Alternatively, it could also stay in the Eurozone but undertake a radical reduction of its debt – via negotiations for haircuts, a restructuring of the debt terms and perhaps even default. This is, by definition, the most direct way to reduce its massive debt levels. However, the question is, “So what?” Dramatically reducing its debt levels will not automatically force Greece to undertake structural reforms to boost competitiveness nor will it change government incentives to be more fiscally prudent. After all, if it can force a debt deal this time, why would the government not believe that it can do more of the same and force another debt deal in the future? Moreover, such debt reduction methods lock Greece out from international credit; no rationally-minded private or public entity will lend to Greece, preventing it from accessing liquidity to drive investments in the country. It really is difficult to see how this measure will force Greece to leave its currently unsustainable path towards a more long-term balanced and productivity-driven growth trajectory.
Hercules took 12 years to complete his labors. The timeline for Greece may be as long, if not longer. But such is the nature of penance; the deeper the crisis, the longer the quest for redemption. And in that quest, the troika’s recommendation – to undertake the IMF’s macroeconomic and structural reform program – provides the best path towards long-term balanced productivity-driven growth, with the additional significant benefit of minimizing negative contagion and default externalities that would certainly plague the Eurozone and the global financial landscape should Greece either leave the Eurozone or radically reduce its debt levels via default. In the meantime, the Greeks face a Herculean task ahead of them but, moving forward, they will have the chance to rise to the heights of one of their greatest ever heroes.