How Can Greece Survive?

Wed, Jul 15, 2015 - 9:36am

Originally posted at The Savvy Street

Its economy crushed by debt, mass unemployment, and bank closures Greece’s only hope may be economic freedom.

'Greece has been devastated and humiliated. Europe has showed itself Pharisaical, incapable of leadership and solidarity,’ said Romano Prodi, the former Italian prime minister.”

The bitter climb-down clears the way towards an €86bn rescue package and the renewal of emergency liquidity for the Greek banking system, once Greece’s parliament has voted for pension cuts, tax rises, and a raft of other measures by Wednesday [July 15]. This is the first of a series of deadlines as the country is kept on a tight leash.”

This week, the long Greek tragi-comedy reached another anti-climax, as Alexis Tsipras, the charismatic young communist leader elected in 2013 to lead a revolt against Greece’s European creditors, seemed to cave in at one minute before midnight, accepting European strictures in return for yet another multi-billion-Euro bailout. So far had matters been pressed, to the supposed deadline and beyond, that it seemed credible that without an agreement Greece could be ejected from the European Union. And no one, in truth, could project with any confidence what that might mean for Greece or for Europe. It would be the first crack in the “indissoluble” 28-member EU since its creation in 1993.

Greece, expressing its defiance of its creditors by electing Mr. Tsipras, had demanded that European institutions forgive some billions in debt run up since the first “bailout” in 2010. After two multi-billion-Euro bailouts and many extensions, the Europeans, led by Germany, which had put up much of the money, demanded that Greece stick to the terms of the early agreements before receiving any more money.

Mr. Tsipras’s bargaining position was not strong. Yes, he had called a snap democratic referendum earlier this month in which the Greek electorate resoundingly rejected the terms of the European rescue deal then on the table. But as the official deadline for an agreement had passed, the European and international lending institutions had begun to act. The Greek government was forced to close down its banks almost two weeks ago, allowing Greeks to withdraw less than 100 Euros a week from cash machines. Now, reports were that food imports into Greece could not continue much longer.

And yet, the Greek voters had seen since 2009 no fewer than seven (yes, 7) “austerity” budgets and measures passed by their parliament, all under left-of-center governments. The Greek parliament had cut thousands of state jobs, extended hours taught by teachers, enacted layoff after layoff of government workers, and increased taxes again and again. Unemployment in Greece is 25 percent—one out of four workers is seeking, but not finding a job, youth (the under 25) unemployment is a mind boggling 50%. Gross domestic product, a measure of overall annual production of goods in services in Greece, had been plunging year after year. Debt had become 350 percent of Gross Domestic Product, not the highest in the world but deadly for an economy in depression..

As a condition of new European and international bailouts, Greece has been ordered to enact laws in the next two days—additional stringencies, taxes, and pension cuts. In my view, Mr. Tsipras, who had negotiated to the very brink, had no choice. He went home to Greece to seek enactment of measures far more stringent that what Greek voters had rejected in the referendum he himself had called.

“An independent fund will take control of €50bn of Greek state assets, collateral to prevent Syriza reneging on the deal at a later date. Three-quarters of this will be used to recapitalize the Greek banks and repay debt.”

“Yanis Varoufakis, the former finance minister, said Greece had been forced to accept a latter day ‘Versailles Treaty’ that will leave the country languishing in perma-slump for years to come.”

Borrowing until it can borrow no more, increasing taxes, cutting welfare and pensions, selling national assets: What more can a country do? How can Greece survive its debt, government spending restrictions, oversight by creditors, and soaring interest rates on government borrowing?

There is nothing left to try. Nothing but capitalism—economic freedom, unchaining private entrepreneurs, corporations, small businesses, and labor to produce more wealth.

What? Yes, produce. You know, not borrow, save, mortgage, or spread wealth already in existence, but create new wealth. Perhaps there is a problem with translation into Greek? But the policy needed to ignite production is tried and true: it is called “economic freedom” or, more controversially but accurately, laissez-faire capitalism.

Well, but Greece is hardly socialist (even though, in its agony, it turned to electing a representative of a far-left party associated with the communists). Let us seek some objectivity.

For more than two decades, the nonprofit Heritage Foundation, in partnership with The Wall Street Journal, has tracked the march of economic freedom around the world with its influential “Index of Economic Freedom.” The Index systematically monitors 10 salient measures of economic freedom, from property rights to freedom of entrepreneurship, in 186 countries.

This is the characterization of what the Index is measuring: “Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, governments allow labor, capital, and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.”

All right, after more than 20 years of being tracked, along with virtually every other nation in the world, and compared and rated on the criteria of economic freedom, where does Greece stand? Well, in 2015, the Index rated Greece 130 in the entire world. In Europe, a more useful comparison, Greece rated number 40 out of 43 countries in the region. And its ranking has been declining for years.

And yet, as far as I can tell, not one condition set by the European creditor nations, and not one measure enacted as part of seven “austerity” packages, had anything to do with increasing economic freedom: the freedom to produce wealth. Throughout the entire years—long, agonizing struggle over Greece, the assumption has been that the wealth is there and the only choice is how to save, tax, and spend it.

Well, is the direction at least right? No. “Once ranked in the ‘moderately free’ category, Greece is now considered ‘mostly unfree.’ With the 10th largest score decline in the 2015 Index, Greece has recorded its lowest economic freedom score ever this year.”

Really? And things aren’t getting better?

Are we at least dimly perceiving why Greece is the poor man of Europe? Why it is “languishing in perma-slump…”?

Having cited the ranking by the Index, I should quote, as well, the conclusions that the years of measuring economic freedom have revealed about its benefits:

As the Index has catalogued, nations with higher degrees of economic freedom prosper because they capitalize more fully on the ability of the free-market system not only to generate, but also to reinforce dynamic growth through efficient resource allocation, value creation, and innovation. Policies that promote freedom, whether through improvements in the rule of law, the promotion of competition and openness, or suitable restraints on the size and economic reach of government, turn out in practice to offer and advance practical solutions to a wide range of economic and social challenges that face the world’s societies.”

Yes, “practical solutions to a wide range of economic and social challenges.”

Nothing could be more evident to even the casual observer, never mind journalists, ministers of state, and prime ministers, that Greece simply has not tried economic freedom in recent memory. It has slashed budgets and pensions, but not regulations. It has embraced austerity but never competition, or restraints on government power, or freedom for entrepreneurs. Quote to me from the bailout agreements or Greek “austerity plans” any admonition to introduce more laissez-faire into the economy. There are a few, a very few, and muted.

Greece has tried “everything” and now is pushed to the wall, its citizens unemployed, hungry, and unable to withdraw their savings from banks. Its government has fought bitterly to protect its welfare expenditures, government jobs, and pension guarantees—but where has a blow been struck to free the producers—the ambitious small businessmen, the entrepreneurs, and, above all, the international corporations that could be lured to Greece by the prospect of an economy that guarantees strict property rights, shuns regulation, reduces the costs imposed on business, sustains a stable currency, and leaves the market as a whole free?

Greece once tried economic freedom—though far from laissez-faire—and succeeded. Greece, under the military junta rule, enjoyed spectacular economic growth for decades, far superior to the record of the welfare-state democracy, in the whole of Europe, their economic miracle second only to Germany.

In Greece, the return to economic liberalism is not even a consideration. It has not been for years. Nothing Greece and its European partners have tried has worked. It is unlikely that any desperation will drive Greece’s leftist Syriza government to turn to a policy of economic liberalism. It is not desperation alone that gives rise to insights that overturn old ideologies, policies, and ideals.

Only new ideas can do that. Without them, the agony of Greece will continue. The villains are those who refuse to see the evidence of the efficacy of the market economy in every possible context—even the political dictatorship of the People’s Republic of China. The villains are those to whom the ideology of collectivism, the doctrine of sacrifice to the “public interest,” and hostility to the proudly uncontrollable mind of the creator of wealth is more important, always, than the mere prosperity, freedom of choice, and pride of their long-suffering countrymen.

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Eoin Treacy: Greek Outcome Either Means Continued Easing or Accelerated Easing in Europe

About the Author

Writer on finance and political economy
Wdonway [at] gmail [dot] com ()