Oct 08, 2010
Crisis in Greece provides important lessonsBack
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There was corruption by powerful government and business interests, which meant that government turned a blind eye to tax avoidance and other illegal activities, and there were some unsustainable spending programmes by government. At the same time, the Greek economy was the victim of economic imbalances in the European region and the global economy and the profligacy endemic to global financial markets, which caused the recent global financial crisis. Greece’s inclusion in the European Union (EU) has some advantages in terms of increasing access to resources and a larger market. However, there are important economic lessons about regional and global integration that South Africa can learn from the problems experienced by Greece and other relatively poor countries in Europe, such as Portugal and Spain.
Firms have different levels of technological proficiency and countries have different levels of industrialisation. Therefore, different countries and firms will have different levels of success in regional and global markets. For example, countries like Greece, Spain, Ireland and Portugal face a distinct disadvantage relative to Germany and other more technologically and industrially advanced countries. Even the increase in direct foreign investment that may result in the transfer of skills and technology from more-advanced economies to less- advanced countries has not reduced the big gaps between these countries within the EU. Therefore, the less-advanced countries in the EU have deindustrialised and a situation has emerged where there is a long-running structural economic imbalance between the advanced industrial countries, which run trade surpluses, and the less-advanced countries, which run trade deficits.
When global liquidity increased with widespread financial liberalisation during the 1980s and 1990s, countries such as Greece had access to increased foreign capital. This increased capital allowed the government of Greece to increase debt rather than collect taxes that the rich had to pay. The Greeks could also continue spending on unsustainable public programmes. Greece’s private sector had access to more foreign borrowing, which was not directed to the country’s struggling industrial sector, but to consumption and speculation in financial and real-estate asset markets. At the same time, careless global financiers treated the increasingly indebted Greek economy as if it had similar risks to those of richer countries, such as Germany. The views on risk in the less-advanced countries of Europe abruptly ended when financial markets crashed and the price of credit default swaps, which were used to mitigate the lending risks of the global financiers, drastically increased. The government of Greece ended up taking responsibility for not only public debt but also high levels of private debt when debt markets collapsed. The sovereign debt problem in Greece resulted not only from wasteful and corrupt practices on the part of the country’s public sector, but also from the fact that Greece, like the US and other European governments, bailed out wasteful and corrupt private- sector financial institutions.
The poorer countries of Europe lack macro- economic sovereignty because they have to follow EU monetary policy rules and are part of the euro currency zone. In other words, countries like Greece were unable to use macroeconomic policies to support and further build their industries.
Further, the strength of the euro, mostly owing to the economic activities of advanced industrial countries like Germany, had a negative impact on industry in Greece. The deindustrialisation resulting from long- running structural economic imbalances within the EU played a big role in creating the debt problems now confronted by the Greek economy. The profligacy in deregulated global financial markets allowed the government of Greece and the country’s private sector to continue building unsustainable levels of debt. Economic integration that causes less-advanced countries to lose economic policy sovereignty with regard to traded protection for industry and the use of macroeconomic policy and exchange rate management can lead to devastating economic consequences.
Edited by: Martin Zhuwakinyu© Reuse this Comment Guidelines (150 word limit)
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