The Precipice of Collapse, Greece Faces Stark Alternatives

The Greek Prime Minister Alexis Tsipras and his Syriza party assumed office with the aim of fundamentally changing European policy for overcoming the sovereign debt crisis. Since the election, it would appear the only changes taking underway are acceleration of Greece's economic collapse toward sovereign bankruptcy and its exit from the eurozone. The willingness of the other euro states to accommodate Greece may not have fallen to zero, but it is certainly small. How did things get to this point? The communication strategy of Greek Finance Minister Yanis Varoufakis has certainly not helped, but it is not the critical factor. What has been critical is that the Greek government has been unable to convince other European states of its analysis of the economic situation.

First, the current government claimed that Greece is overburdened by its debt service and would not be able to achieve economic recovery without more debt relief. And it is true that the government debt ratio of 175 per cent is very high. However, three quarters of the government debt is in the form of aid credits from other nations, which have granted Greece very long maturities with very low interest rates. This was a hidden form of debt relief. As a consequence, the interest burden of around four per cent of GDP is no greater in the Greek national budget than Portugal’s.

Second, Alexis Tsipras argued that the crisis has thrown Greece into poverty, and that assistance is necessary on humanitarian grounds. Nobody can dispute that Greece has undergone a severe recession. However, Greek per capita GDP is around 16,000 euros, similar to that of Portugal. Thus, Greece's standard of living is better than that of Estonia (14,800 euros) or Slovakia (13,900 euros) - two nations that would incur losses in the event of further debt relief for Greece. One could counter this argument by pointing out that average per capita income says nothing about the situation for the poorest social strata. While this may be correct, providing for the poor is a task of the Greek government, not the EU. Nobody is forcing Greece to cut social spending for its poorest citizens. It could save on other expenditures and it could also raise taxes on the more affluent.

Third, the Greek government claims that tax increases and reductions in government expenditures would needlessly aggravate Greece's economic crisis. This is also less than persuasive. Since the government budget showed a large deficit at the onset of the crisis, a harsh consolidation programme was unavoidable. Other nations had to do the same. That the recession in Greece was deeper than elsewhere is primarily because Greek exports were hit harder. In Portugal, revenues from the export of goods and services are around 20 per cent higher today than before the onset of the crisis in 2008. In Greece, they have fallen even further. If Greek exports had trended similar to those of Portugal, Greek GDP would be 8 per cent higher today. The core problem of the Greek economy does not have to do with the inevitable decline in domestic demand. It has to do with Greece's lack of competitiveness in international markets.

Fourth and finally, the Syriza regime wants to nationalise private companies instead of privatising state enterprises. In addition, it has promised a higher minimum wage and massive hiring in the public sector. This plan not only violates agreements with creditor states but also runs counter to all economic reason. European policymakers are trying to protect Greece from economic self-destruction. European Commission President Jean-Claude Juncker recently proclaimed that he rules out Greece's exit from the euro. This is wishful thinking. Only a radical change in economic policy by Athens can prevent such a 'Grexit'.