July 21, 2016
Limping Away from Disaster
By Jörg Bibow
Research Associate at the Levy Institute of Bard College and Professor of Economics at Skidmore College.

The European Union was built around economic cooperation, and the crisis in Greece, which has seen its economy crippled in recent years, offers the union an opportunity to uphold the values for which it has stood historically.

What became the European Union of 28 member states, as of today, started as an initiative to secure lasting peace in Europe. Fostering economic integration through freer trade and cooperation was adopted as a means towards that end. As matters progressed, the union of Western democracies became more ambitious both regionally and globally, promoting human rights and spreading European ideals and values, and welcoming new members. Internally, among its members, care was taken to balance old fears of domination; compromise to assure mutual gains and build partnerships became the accepted mode of co-operation. The union’s official motto is “united in diversity” as it has accepted as its duty the protection of national and regional cultures. The principles of free movement of people, trade and finance were seen as a path to shared prosperity. To support convergence and cohesion among its members, the EU features a small common budget that provides resources to disadvantaged regions.

Greece joined the union in 1981 and has benefited from its membership in important ways. Having emerged from military dictatorship only a few years earlier, European integration was a helping hand protecting the new democracy. As one of the union’s poorer members, Greece has been a continuous recipient of funds from the EU budget, which have supported its development and catching up. Like fellow EU citizens in other partner countries, Greeks enjoyed the liberties and freedoms that a borderless continent and large market has to offer.

Greece initially seemed to do well under the euro, the common currency of 19 EU member states that was launched in 1999 and which Greece joined two years later. Greece was catching up and per capita incomes were rising fast until crisis struck in 2009 — an unresolved disaster that is dividing the continent today and which is at risk of deteriorating further and ultimately demolishing the proud product of European integration.

The Greek crisis has reached truly historical dimensions and shows few signs of abating. The economy has lost more than a quarter of its size and domestic demand is about one- third below its pre-crisis level. Accordingly, a quarter of the labor force is unemployed;  half of all young people are without a job. A calamity of this dimension was unheard of since the arrival of macroeconomic policymaking after World War II. The situation in Greece today is only comparable to that in Germany and the United States after the Great Depression of the 1930s. Political radicalization rose with poverty in both countries at the time. To the detriment of humanity, things turned to extremes in one of them.

The EU, and the currency union that is a part of it, has not been dealing well with its homemade internal crisis. Greece is not alone in suffering the consequences, but in Greece things are far worse than anywhere else. The austerity medicine that was supposed to bring healing was applied to the Greek patient in a dosage that ignored all prescription warnings. The IMF has admitted as much publicly and has demanded a change in policy that would leave Greece more room to breathe again. Greece’s EU partners, under German leadership, insist on additional austerity measures and budget targets that can only augment the already-crippling effects. The Greeks are in despair: child mortality rates are surging, youths are fleeing the country in flocks, poverty afflicts more than a third of the population. This is how the EU is practicing its high ideals for humanity at home?

The EU and Greece need a fundamental U-turn. Instead of rolling over and demanding repayment of debts that should have been written off six years ago, the EU should significantly increase its financial support for Greece to foster recovery. As part of a continent-wide initiative to boost infrastructure investment, the initiative could be focused on transforming Europe’s energy and transport infrastructure to meet the climate change challenge as well as driving the union’s recovery and return to prosperity. For the past six years, ill-guided austerity has held back incomes and pushed up indebtedness. Only a push for investment can reverse Europe’s fortunes.

The EU authorities too have actually acknowledged their failings. The EU’s Presidents have published reports that diagnose the euro currency union as “incomplete” and peculiarly vulnerable to crises. Clearly this kind of diagnosis calls for shared responsibility rather than punishment of the union’s weakest member. Greece has far overpaid its own share of blame — as the decline in incomes and rise in poverty show all too clearly.

It is high time to end the torture and show generosity instead. Today, the EU is demolishing its own ideals and values. Without a sea-change in policy approach, European integration remains a slow-motion train wreck – with Greece its disgraceful limping advertisement of joint ruin.

Jörg BibowJörg Bibow is a Research Associate at the Levy Institute of Bard College and Professor of Economics at Skidmore College. His research focuses on central banking and financial systems and the effects of monetary policy on economic performance, especially the monetary policies of the Bundesbank and the European Central Bank. Bibow has lectured at the University of Cambridge, University of Hamburg, and Franklin University Switzerland on central banking and European integration and was a visiting scholar at the Levy Institute. He received his MA and Ph.D. degrees in economics from the University of Cambridge.