- The Washington Times - Wednesday, May 16, 2012

The forces of big spending will have another shot at the polls next month in Greece. The Syriza party, which is strongly opposed to austerity programs, is expected to gain in the upcoming election. Unfortunately for the long-suffering Greek taxpayers, opposition to austerity means, in all probability, that Greece will remain stuck in the recessionary spiral that’s dizzied the nation for the last four years.

Though protesters scream about draconian cuts and enforced austerity, actual government spending in Greece has declined by a mere 3 percent. Such a small slice only counts as “draconian” in profligate places like Brussels, Athens and Washington. The Greek economy, on the other hand, has shrunk by 20 percent over the last four years.

The much-despised European Union (EU) and International Monetary Fund bailouts have continued to pour billions of dollars into Greece, keeping the bankrupt state afloat. That has allowed the government to maintain itself without any real austerity in practice. Private bondholders recently agreed to take a 70 percent “haircut,” further easing the public sector’s debt burden. These creditors aren’t happy, as the outgoing government made a $552 million payment to creditors who had refused to accept the swap - even though the government’s terms were that these debt-holders would not receive anything. Such action avoids an immediate default but will hold long-term consequences.

The failure of Greece to form a coalition government will now mean the next tranche of the bailout might not be released, and the public sector might run out of funds before mid-June when the elections are scheduled. The timing couldn’t be worse. June is also the start of the tourist season, a major driver of the Greek economy.

The problems of Greece go still deeper. The real exchange rate has been steadily appreciating for years, making Greek exports - including Greek tourism - more expensive. The easy fix, letting the currency depreciate, is not an option because Greece belongs to the eurozone.

This means Greece has to make all the hard choices if it is to ever find its way back to prosperity. If Greece chooses to remain in the eurozone, there will have to be a certain amount of deflation to make the exchange rate competitive. Increasingly, the question is when, not if, Greece will exit from the EU. Exit will solve a short-term problem by allowing Greece to re-establish the drachma, matching the currency’s value to what the market expects to restore competitiveness. This will work for a while, but devaluation unaccompanied by other reform will leave Greece with all its present problems, and an additional one: inflation.

Whether or not Greece stays in the EU, it must ease the burden of regulation so that it’s less difficult to start a business, hire employees and enter a new profession. Greece imposes massive entry barriers to professions and entrepreneurs, which strangles the potential for economic growth. That must change.

The present path Greece is on leads to ruin. Instead, the country should look to emulate the Baltic states, which have shrunk government and increased economic freedom.

The Washington Times