Editor's note

Attacks on the EU institutions and governance explode from both the Baltics and the Mediterranean. The problems that led into crisis the Baltic and the Mediterranean states are almost the same, though the remedies are different. The logic of a southern Europe’s tragedy was a replica of the motives that drove the same process in the Baltics, e.g. Latvia. Besides, most of the reasons in both sub-regions were being masked for decades and often just locked from the public. The role of the EU, the member states and IMF is being great in both regions.  

There have been various clarifications and explanations given lately about the crisis that so “unexpectedly” hit Greece. No need to repeat the arguments; the Greek’s tragedy reveals something more important, i.e. the sins committed and remedies to be employed.

1. The implementation of a reform package (generally approved at the recent EU’s informal summit) is facing a major national problem in Greece, i.e. state-owned and probably the last socialist-type economy in the EU. The main reform idea is a constant privatisation ahead of all other priorities.

The magnitude of state control is really enormous: the Greek state owns almost everything –from airports and hospitals to postal services, transport, banks and insurance companies, including universities, hotels, marinas, ports, casinos and lotteries. Privatisation is regarded, at least potentially, as a huge opportunity to make public finances alive and manageable. At the same time, privatisation can be a source of revenues: one per cent of GDP, or about 2,5-3 bln in 2010, and doubling the amount up to 2012. For example, the government owns about 10 bln euro in listed companies on Athens Stock Exchange.  

However, socialist government in Greece had something else in mind; its leader, George Papandreou has been a dedicated socialist. He is the head on both national Pasok –Panhellenic Socialist Movement and international Socialist Movement, i.e. Socialist International, as an umbrella group of center-left parties worldwide. He is fond of “Scandinavian socialism”: he once said he wanted to make Greece “the Denmark of the south”. Well, there is a Danish leader in the European social-democrats movement too.  

One obvious reason that socialist ideas are deeply popular is that, e.g. pension age in the country is 55-58 while in other EU members is about 62-65; the country is forced, however, to increase the retirement age by seven years.    

2. The socialist trend in national governance rule leads to another purely Greece phenomenon: regional and local authorities in Greece, including local banks, are government-nominated. All efforts to make the system more democratic ended in national opposition. The country’s governance system is based on the Prime Minister’s “Byzantine court”, a group of advisers, mainly Greeks with solid international background and national eminence.  

Therefore, Greece central and local governments regard the surveillance plan in the EU reform package as a serious intervention into national affairs and even as partial surrender of country’s sovereignty.

3. Bad tax collection is a logical consequence of the previous “sins”. The common opinion is “why paying taxes if we can share them between us”. It does not help much enforcing optimal tax collection from inside – budget’s fiscal soundness would not improve anyway. The reason is simple: the taxpayers know well how the governance system works and how the budget functions, the latter does not need their impetus, besides, there are plenty of other means to cover the deficit.  

4. As a result of poor tax collection, there is a growing government’s debt used to cover public needs. Public finances have been out of control: government debt reached 125 per cent of GDP, the highest in the Union (with 60 per cent limit in eurozone). The public sector has become unmanageably big and inefficient.

The money to cover public debt comes from both the EU member states’ financial institutions, mainly banks (as well as from other countries) and through EU subsidies.

As to the former, Greece is fully indebted to its eurozone’s fellow-members. Thus, according to Bank for International Settlements (the so-called central bank for world’s central banks), Greece owes to international lenders about 220 bln euro out of total 300 bln Greek government debt. The Greek banks own only 40 bln of the assets. Remarkable, of all Greek bond emissions during last decade only about 30 per cent was allocated domestically (almost a quarter was taken by the UK and Ireland); the rest is still in the “hands” of France and Germany. No wander the leaders of these two states govern the rescue package for Greece.   

The biggest exposures to the crisis are mostly sovereign and private investors from France –about 60 bln, Switzerland –about 50 bln and Germany –about 43 bln; small share belongs to the US –12 bln, the UK- about 10 bln and Holland –9 bln. Some of these countries directly own local banks in Greece, e.g. French Credit Agricole and Societe General or German Deutsche Bank.

As to the Union’s share, Greece received since its adhesion to the Union billions of euro in regional and cohesion assistance from numerous EU funds. 

5. The Greek’s way into the currency union has been well known: it cheated the initial 10 members with cooked accountancy books. Because of this the Greek membership was postponed for several months. Then, the political idea of eurozone enlargement took over the cautious risks and Greece was accepted as the 11^th zone’s member. However, the EU did not learn the lesson and the tragedy happens again after about a decade.

The new EU treaty, for the first time has established rules on how the member states can raise and spend their revenues (whole chapter on economic and monetary issues). Besides, the eurozone has its own monetary rules, with their cautious expenditures aimed at safeguarding both big and small states against bailouts. It seems that the eurozone has broken its own rules when France and Germany revealed their efforts to remedy the situation. Are they not protecting their own financial interests?     

6. Worst effect would be for the national and foreign banks and other financial institutions holding Greek assets. As was shown above, the French and German banks suffer most. It is these states’ financial authorities that are forcing their governments to act until it is not too late.

7. As to the rescue instruments, the EU made a “political decision”, i.e. within the eurozone countries it is the group’s member states rather than the Union that would provide for certain remedies.

As to the other EU member states, e.g. Hungary and Latvia in 2008-09, the triple efforts of recovery have been made. They definitely made a change, i.e. the efforts of Commission, the member states and IMF. There is something to mention specifically: among all “real savers”, only the IMF can provide funding conditions for Greece as strict as the market itself. Hence, trust and credibility in this institution, which is presently in high demand even in the EU, e.g. quite successful Poland economy enjoys the IMF credit line.

A slight worry that Greece cannot refinance most acute debt (12 bln euro already in April) was quickly removed by the country’s bond emission. The trust in the Greek’s authority is still there: the initial expectation of acquiring 5 bln quickly turned into 8 bln. Besides, Greek default can be easily resolved, i.e. the country’s minor economy represents about 2,5-3 per cent of the eurozone’s GDP.

To conclude, nether the Union, not the euro is doomed; both will, certainly, survive. The Greek default will probably make “con-federation” cooperation among the sovereign states even more active and resolute. No country is forced out the currency union, its membership still increasing from initial 11 to present 16 during a last decade.

The EU’s problem lies in the fact that it is extremely difficult to enforce fiscal discipline within the currency union consisting of independent and sovereign states; even if they are the members of the Union. In the Treaty of Lisbon, in its TFEU’s part, the monetary issues occupy major part in the “economic and monetary policy”: economy –seven articles, monetary –17. The global market’s confidence in euro is still great, it has become a reserve currency de facto behind the US dollar.

However, the way the EU deals with the crisis (on both sides of Europe, and elsewhere) hangs on a delicate balance: the EU authorities are witnessing the members going to the brink in the development but still keep a blind eye on a politically sensitive issue of falling over the cliff. And only at the last moment they come running to save them from falling over, whatever means it takes. Why wait so long?  

Greek tragedy teaches one important lesson in the EU economic policy. Before the present crisis, the EU members, particularly those in the eurozone, did not enjoy a coherent and practical fiscal cooperation, however, the financial and monetary environment is closely interdependent. The crisis has revealed insufficient Treaty’s guidelines; it is up to the member states now to make adequate changes.