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BY DR. JIM LEONTIADES
CIIM, The Cyprus Business School
The Eurozone was greeted with many doubts at its inception. These were based mainly on economic arguments, for and against its benefits. The current financial crisis in Greece highlights two aspects which have been relatively neglected, politics and culture.
Both of the above will now be brought into prominence by the efforts of the Eurozone to “bail out” Greece and particularly the involvement of the International Monetary Fund.
Even before the IMF stepped in, the political repercussions were quickly made evident by the Greek street demonstrations against government plans to comply with Eurozone requirements. Parades and street battles against the government’s proposed austerity measures were only the most visible signs of political pressure and popular unrest. Divisions also became obvious within the general population as to who should bear the brunt of the required austerity measures. The civil servants plainly indicated they would not agree to cutbacks in their pay or pensions. The more wealthy have hastened to move capital out of the country. More generally there has been a feeling among the less wealthy that there was widespread tax evasion – any needed funds should be obtained by taxing these evaders.
QUESTIONS OF SOVEREIGNTY
The situation has been aggravated by the reluctance of other Eurozone members to provide the full amount of financial assistance Greece required. This brought in the IMF with membership including countries outside the Eurozone. Greece is a country that is most welcoming and friendly to foreigners if these come as guests. There are perhaps no countries more sensitive and hostile (with the possible exception of the Cyprus) to foreigners who appear to transgress on Greek sovereignty.
Greece sacrificed a bit of its sovereignty on joining the European Union. The sacrifice was scarcely noticeable to the man on the street. In any case, it appeared to be amply compensated by the major benefits Greece enjoyed as a member of the EU. A bit more sovereignty was sacrificed when Greece joined the Eurozone. Again the sacrifice (adhering to certain levels of national debt and annual deficit) was not very noticeable, particularly since it appears the government paid little attention to Eurozone strictures.
Things have changed. Asking the European partners for support and having to listen to criticisms and chastisements by Germany regarding Greek financial irresponsibility has already caused a furor within the Greek community. Memories going back to World War II have been dredged up. The entry of the IMF into the picture further contributed to the dismay of the proud Greeks. The IMF has a reputation of imposing harsh austerity measures. It has had a number of failures (widely publicized) as well as success, less widely publicized. Nevertheless, someone had to provide the needed financial help and there is little doubt that if Greece is to meet its obligations and stay within the Eurozone, both money and major unpopular changes will be required. The present government will have to impose harsh measures, much harsher than anticipated only a few months ago. The political cost of these will be great, possibly leading to a loss of office for the government.
ADOPTING THE GERMAN MODEL
Taken collectively the changes proposed by the Eurozone and the IMF are aimed at
improving the management of the Greek economy. Another effect is that they will bring it closer to the German model. It is no secret that the Eurozone was modeled on the discipline and institutions, particularly the German central bank (the Bundesbank) which made the German economy so successful. Adopting this model is less difficult for countries such as Belgium, Netherlands and Luxembourg.
In terms of institutions and culture, these countries have been, from the beginning, closer to the German model. Greece is at the other extreme. It is one of the Eurozone countries most distant from this model both in temperament and political institutions. This distinction is perhaps the reason why there have already been suggestions of a smaller Eurozone, “a mini Eurozone” limited to the present Eurozone members which are more similar financially and culturally to Germany.
STAY OR LEAVE?
The advantages of the present Eurozone for Greece have been substantial. One of these has been the ability to borrow more easily abroad. This, it may be argued, is partly responsible for the present over-borrowed situation of the Greek economy.
Today, there is little choice left for Greece but to remain in the Eurozone and to accept its requirements. In the longer term the desirability of Greece remaining within the Eurozone is less clear. The current crisis has revealed major weaknesses in the Eurozone. Already there has been talk of the need for greater discipline of the member countries. Will the Greeks be willing to change their institutions and attitudes to the degree required to comply with the even stricter Eurozone requirements that are surely coming after the immediate crisis is over? How important is the economic sovereignty which is sacrificed by remaining a member? Eleven EU countries are already outside the Eurozone. They have not benefited from its advantages but neither are they in quite the same disastrous financial situation as the Greeks.
For Greece to leave the Eurozone or be forced out is not out of the question, irrespective of official denials. If it should come to this, the impact on Cyprus would be enormous. Cyprus is by no means a disinterested bystander to the events presently unfolding in Greece.
