How can Europe help the Greeks?

Andreas Freytag

Friedrich-Schiller-University Jena

Andreas Freytag is a Professor of Economics at the Friedrich-Schiller-University Jena and Honorary Professor at the University of Stellenbosch.

Prof. Dr. Freytag obtained his diploma from the University of Kiel, his doctorate as well his Habilitation from the University of Cologne. Prior to his appointment in Jena, he worked at the Kiel Institute for World Economics, the University of Cologne, Cambridge University (as Visiting Scholar), and the Eesti Pank, Tallinn, Estonia. He has been consultant for the EU-Commission, the OECD, the IMF and various public and private clients.

Over 200 Billion Euros have been handed to Greece. Additional rescue funds will probably follow. Except: The government operates in a nepotistic way and the money doesn’t go to the Greek people.

Once again an endgame is imminent. Once again a state bankruptcy of Greece is impending. And once again all parties involved in the Greek drama use big words. Mr. Tsipras threatens with the chaos that would follow a Grexit. Mr. Schäuble demands necessary reforms, and even Mr. Juncker shows himself disappointed by his friend Tsipras.

We can be reasonably certain that these theatrical rumblings are only here to calm a less and less well-disposed audience and prepare the next bailout. Had the G7 Summit in Italy taken place, Mr. Juncker would not have appeared before the press in such a dramatic way. He knows what he owes the Germans.

It has long become apparent that the new Greek government behaves in a similar nepotistic way to the previous government and that it has little interest in a real restructuring of public finances and in improving the living conditions of the people in Greece.

Participation in the government in Greece is apparently perceived by the incumbents as a short-term right to exploit the country – no matter how socialist one declares to be – and as long as possible until the next one comes.

It is interesting that the Greeks don’t simply remove once and for all their politicians, who evidently hail from a homogeneous background, from office, and on the contrary accept their permanent mistakes. An oversized interest in a functioning community doesn’t seem to exist. At the same time the Greeks are, according to experiences made in the past, incredibly generous hosts and warm friends. The Greeks do a great deal for their families and friends. In contrast, they apparently don’t pay their taxes willingly. Love for your neighbor and contempt for those far away.

Anthropologists and sociologists may try to explain the causes of this apparent contradiction. However, it clearly shows that further funding to Greece through the member countries of the Eurozone or their protection agencies has little chance of success.

Six years after the crisis broke and repeated – especially external – efforts to reform Greece’s politics and administration, nothing has happened yet, and we arguably can’t expect that more money will change this behavior.

The situation is all the more tragic given that the disadvantaged population in Greece, that is to say, the poor in the cities and the young people who are unemployed despite being well educated, are not going to be better off, neither with the continued existence of a “failed state” and its nepotism and corruption, nor with the authorization of a new bailout deal from the Eurozone.

Grexit as a sustainable solution to the crisis

So what to do?

First of all, it is necessary that the European decision-makers realize that the rescue politics in the case of Greece has been a complete failure. Every additional billion is only extending the agony in Greece.

The consequence is that another rescue package is pointless and that Greece’s state bankruptcy is unavoidable. To prevent a panic, controls over the movement of capital should be established. Then Greece’s exit from the monetary union should follow as well as the introduction of a new (old) currency in conjunction with an additional debt cut or a debt restructuring, that is to say, a transformation of the Greek government bonds into titles without interests.

This way, the European Central Bank (ECB) would be protected from bankruptcy, and Greece could come back to the capital markets after a short time, as long as the conditions are fulfilled from the point of view of investors.

The reform of the monetary union would probably entail depreciation in real terms in the mid-double-digit percentage range.

The English version is translated by Ms. Alix Auzepy. The original German version of this article appeared in Wirtschafts Woche on June 12, 2015. Click here to read the original article.

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American Institute for Contemporary German Studies.