Limbo does exist because Greece is stuck in it. The Greek economy is shrinking for the fifth year in a row, and no savior is in sight to pull it out. Unless Athens pursues serious internal reform, the country won’t be able to stay in the eurozone or renew economic growth.
German Chancellor Angela Merkel is pushing for another bailout, but 54 percent of the German electorate is against throwing more money into Greece or taking on debt to provide more bailouts. She is likely to find an equally cool reception this week in Canada, where Conservative Prime Minister Stephen Harper and Finance Minister Jim Flaherty refuse to contribute to further handouts engineered by the International Monetary Fund.
A Greek exit from the eurozone is considered a viable — if not inevitable — option. There are increasing reports that German banks have made plans for a Greek departure, and the German Constitutional Court is expected to rule next month on whether the European Stability Mechanism, the new rescue facility, violates German law. Such a finding would jeopardize the continued existence of the euro currency itself.
Separating Greece from Europe would carry some mixed blessings. The Greek real exchange rate has appreciated over the past few years, decreasing the competitiveness of Greek exports and contributing to the nation’s economic woes. Exiting the euro would allow Greece to devalue its currency and — at the cost of some inflation — immediately restore competitiveness.
Currency adjustments are only a temporary fix if they aren’t accompanied by structural changes. Those should include privatization far beyond what’s been tried so far and sharp reductions in the regulatory red tape choking private enterprise. Without these reforms, any gains from currency depreciation will vanish quickly. There is little evidence of political will to privatize. The Greek power system is almost wholly government-owned, giving public-sector unions enormous leverage to block reform by threats to strike. The original goal of privatizing $61 billion of public assets by 2015 has been halved, and Athens is unlikely to meet even that modest goal. As of the end of fiscal 2012, a mere $2.6 billion is expected to be realized through privatization.
The Greek economy has shrunk 15 percent in the past two years. Without privatization and regulatory reform, Greece will continue its downward spiral, leaving more people unemployed. Athens needs to learn from Ottawa, which accepted the reality that its welfare state was doomed and pushed through politically tough spending cuts and reforms in the 1990s. Canada consequently weathered the current global slowdown better than most developed countries. How Canada implemented its reforms is a topic Mrs. Merkel should discuss with Mr. Harper on the current state visit.
The Washington Times