The PIGS Strike Back

“Eurozone is like ‘Hotel California’ - you can check in anytime, but you can never leave”

News | Bojana Simeunovic | March 2010

Nearly 50,000 Greek workers huddled together on the streets of Athens, taking over the city on Feb. 24. During the 24-hour long strike thousands of anxious Greeks protested against the government’s strict measures which intend to increase taxes and cut the salaries in order to improve the country’s debt crisis. The protests developed into violence, with police firing tear gas and seriously hurting some demonstrators.

This is only one out of many strikes that have taken place during past months. The PIGS Strike Back, as the motto says, is a clear message to the government that Greek citizens are refusing to pay higher taxes to help solve the crisis which they say is not their fault. "We will not pay for your crisis" posters read, as they have in cities all over Europe. Across Greece, state workers are desperate and angry because of salary reductions and tax increases that have recently come into force.

"From Feb. 7-10, customs officials and farmers protested non stop, causing a complete blockade of Greek borders," said Nikola Nesic, a student at City College, International Faculty of the University of Sheffield in Thessaloniki. "When I was finally able to leave the country for a few days, I was again stopped by the strikes spread all over the city." After waiting hopelessly for a taxi to get to the bus station, a pedestrian came by telling Nesic that the taxi drivers were also on strike because of the tax increase.

While on the Aegean, people were burning EU flags and blaming the government for the desperate situation, on the other side of the continent, the EU – frustrated by Greek temper tantrums – met in Brussels to try to figure out what to do. As the Feb.10 summit ended, a decision, signed by all 27 member states, announced that the EU would step in and provide immediate financial help in the case of emergency.

"Eurozone member states will take determined and coordinated action if needed to safeguard stability in the euro area as a whole," the president of the European Council, Herman Van Rompuy told reporters.

German Chancellor Angela Merkel backed him up. "Greece won’t be left alone but there are rules and these rules must be adhered to," Merkel said to journalists after the summit. The agreement will be looked at again next month.

The worst crisis in the eleven years since the launching of the single currency takes its roots from the events of 2004, when the European Commission conducted in depth research on the Greek budget, and concluded that the data on which Greece had entered the European Monetary Union was, at best, incomplete. The previous Greek government had excluded a large share of military expenses from the statistics, misrepresenting the deficit, which was one of four key criteria for Greece’s accession to the Eurozone. According to Eurostat, the statistical arm of the European Commission, the budget criteria were first met in 2006, not in 2001 as Greece had claimed in its application for membership in the EMU.

"Greece shouldn’t have joined the Eurozone in the first place," said Nicolas Firzli, Director of the CEE Council – a Paris-based economic strategy think-tank – and member of the International Committee of the French Society of Financial Analysts (SFAF), in a telephone interview. "Greece was de facto blackmailed by Brussels, Berlin, and Washington into severing its ties to Serbia in the mid-nineties, in exchange for the promise of further financial integration within the EU at a time when Greece clearly wasn’t ready to join the euro."

Greece has long been considered an irresponsible stepchild in Europe, at least since the time of Bismarck, who saw it as "morally corrupted and culturally inferior."

"Sadly, this xenophobic attitude still persists: the overt infringements on Greek sovereignty we’re witnessing today with EU policy makers double-checking all national data and carefully ‘monitoring’ the work of the Greek government sets a dangerous precedent," Frizli explained. In fact, the chief economic adviser to Chancellor Merkel has suggested that Greece lose its EU voting rights as a reprimand for required bailouts.

Since the early 1990s, Greek national debt has been consistently higher than the EU average. Unable to avoid rising unemployment and persistent corruption, the Greek economy unraveled. In 2009, the Index of Economic Freedom placed Greece in the second lowest position of all EU member states, more or less eliminating it from global competitiveness rankings. By December, both domestic and global financial pressures had damaged Greece’s economy even further, resulting in the worst economic crisis the country has experienced since 1993.  Irresponsible lending practices -- a 100% increase in loans-savings statistical ratio – had led to a deficit of 12.7% of current GDP.

Greece now has the second highest budget deficit and the second highest debt to GDP ratio in the EU.

"The current mess happened because decision makers across Europe have put politics and ideology above economic common sense," Firzli said.

A series of irresponsible tax cuts have left government coffers nearly empty.  In 2004 a Tax Reform Act reduced levies on private companies, and introduced a series of measures to encourage and spur innovation. All well intentioned, but expensive. At the same time, they did, however, set up protocols for more transparent enquiries into tax audits. The second phase of these reforms took effect in 2007, lowering personal income taxes on the way to lowering the effective tax rate from 30% to 25% by 2009.

"Over the past 12 years Greece, together with other EU countries, engaged in debt-fueled government spending actions and aggressive deregulation across the board," Firzli explained, "while publicly proclaiming their attachment to the sacrosanct Maastricht criteria – a set of stringent macroeconomic constraints disconnected from the local economic cycles of individual member states." As Firzli emphasized, these countries have put together "the worst traits of Keynesian profligacy and rigid monetarist doctrinarism." Keynes believed that in times of deep recession, government spending was necessary to stimulate demand, generating higher economic activity while simultaneously cutting unemployment. His recommendations also included stimulation of the economy by reduction in interest rates and government investment in infrastructure.

The main causes of the revenue shortfall – tax avoidance and sometimes tax ignorance – contributed to a year-end policy review, and a decision by the Greek government to completely reform their tax system. Proposals include the introduction of a single, progressive tax scale on individuals and real property, as well as the abolition of corporate tax exemption. Other plans include increased governmental oversight and more efficient tax authority to combating tax evasion.

"The EU central bankers now want to impose a harsh deflationary course… in the form of ‘corrective policies’ such as drastic austerity measures and substantially higher taxes, a recipe for economic decline and social unrest for years to come," Firzli said. The only option for the EU is to create a sort of "orderly default," to allow Greece to withdraw from the Eurozone and simultaneously reintroduce the drachma, Greece’s previous national currency, at a debased rate. "Such an abrupt readjustment might be painful at first," Frizli asserted, "but it will ultimately strengthen the Greek economy and make the Eurozone more cohesive."

However, the EU member states are remaining loyal to their commitments – based on the honor codes of the partnership and responsibility to prevent the failure of the euro. Germany and France, with their strong economies, are leading the pack, by putting considerable pressure on other member states. Both of these countries are ready to step in, although an official request has yet to be given. Others will follow.

"The decision to bail out Greece can have two effects on the EU; it can either lead to greater integration or can question the union solidarity," explained Johannes Pollak, Senior Research Professor of International Relations at Webster University Vienna. "The introduction of macroeconomic coordination – for instance tax regulations – would give the Commission more rights, tighten member  ooperation and prevent the problems we are experiencing right now." It will not necessarily correct deficiencies in national taxation systems, Pollak said, as the EU member states have realized that blind trust in fellow members is not always wise.

"On the other hand, the crisis could tear the Union apart, creating different layers between the member states," Pollak said. The innermost layer, as Pollak suggested, which includes the original six member states, would move together in bailing out Greece. This would provoke a reaction from other, more undecided member states, which would likely provide tacit support for the decision.

"If we do not see another crucial economic crisis by the end of the summer," Pollak concluded, "there is only a slight chance that the EU will fall apart."

Ultimately, Greece is not the only one teetering on the edge of financial disaster. Portugal, Spain and Ireland are just a step behind. The current financial crisis has seriously threatened the value of the euro, provoking the EU’s instant response to stop a domino effect and prevent a possible failure of the currency. This decision effectively obligates the EU to help other members – Portugal, Spain and Ireland – to prevent them from following in Greece’s path. Whether the EU’s is actually able to do so, remains to be seen. In the mean time, serious domestic measures will have to be taken in countries such as Greece – an uphill battle in a climate of virulent public opposition to such painful economic policies.

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