Solomon: Europe's Bailout Addiction
“What are the first three letters of the Greek alphabet? I.O.U.” “I had a Greek dinner last night. I left the restaurant without paying the bill.” — I could probably find enough of these jokes to fill this paper for a week. That is not only concerning, but also reflective of what the Greek financial crisis has become, even in the unintellectual and at-times pathetic world of online humor — an international laughingstock. Despite receiving loans of more than €230 billion in rescue financing from Eurozone countries, the European Central Bank and the International Monetary Fund since 2010, Greece’s economy has shrunk by a quarter over the last six years, its unemployment rate remains roughly 25 percent — not including discouraged workers — and the country’s poverty rate ranks among the highest in the European Union.
Still, the EU just approved a third bailout package worth roughly $97 billion. Recent Greek interventions have consistently fallen short, yet they keep happening. It is worth examining why.
A part of why Greece keeps getting bailed out is simply because it keeps needing to be. That has a lot to do with mistakes on the part of the Greek government — rather than lowering taxes and promoting trade liberalization, Greece’s austerity measures have increased taxes and cut pensions, harming its growth and intensifying social unrest.
Greece’s sluggish trod to recovery also may have something to do with its unstable sources of revenue. For the most part, Greece’s economy depends on tourism. That would explain why, while much of the world was struggling with their own economic situations over the last five years, tourists weren’t bringing the same amount of revenue to Greece as they previously had. It is possible that with improved consumer confidence, investment in Greek tourism will generate the boost the country needs to get back on its feet.
Some of Greece’s problems are also due to structural flaws in the EU. Budget and tax policy decisions are still left in the hands of each country, a shaky arrangement that many doubted would be viable in the long term. Greece’s reluctance and occasional refusal to implement EU bailout terms has shown just how unstable the status quo is. The Eurozone’s containment strategy has fundamental shortcomings, and Greece will likely find itself on its knees again soon.
Workable alternatives to continual Greek bailouts do exist, of which the most well-supported would be a Grexit — withdrawing from the currency union but not necessarily from the EU.
So why is a Grexit always the last-resort option? The first economic justification many policymakers might lean on is the idea of a sunk cost — so much money has already been invested in helping Greece that giving up would put it all to waste. There is also the concept of a domino effect, which predicts that the failure of the euro in Greece would be contagious and spread to other European countries.
From an economic perspective, the arguments in favor of repeated Greek bailouts are fairly standard and even convincing to some, but I think there exists a more complex backstory. I would say that the reason the EU has not been as eager about letting Greece go as it perhaps should be stems from political sentimentalism.
Greece’s European saviors may still dream of a “United States of Europe.” They may not want to admit that the Eurozone was probably a bad idea, and they may still be influenced by an affinity for Greek culture and the image of a classical, prosperous Greece. Political elites may feel an emotional attachment to European solidarity, which makes perfect sense when considering Europe’s long history of conflict. Europe’s political, economic and religious allegiances have shifted to such a great extent during the past century that the sense of relief the European Union has provided seems precious and worth fighting for.
Moreover, separate and competing factions within Europe are harder to form now that economic and political decisions are so interconnected. Perhaps European leaders go to such lengths to avoid a Grexit because they fear it would look like a regression into the past.
Economic arguments cannot be the only motivation for so many Greek bailouts. Europe’s culture, its desperate allegiance to political unity and a dark past that still looms large may help explain why the EU insists on keeping the euro alive in Greece.