3 Reasons Greece Never Should Have Joined the EU
Greece never should have joined the EU in the first place. Doing so tied the nation down, pushed them into a world of easier credit, and flooded the country with cheap exports. When Greece joined the EU, they signed away economic sovereignty and prosperity.
Debt: Greece’s Original Sin
Ever since the founding of modern Greece in the late 1800’s, debt has played a central role in guiding its policies. After losing a monumental war against the Ottoman Empire in 1888, Greece was forced to pay hefty reparations to the Ottomans and repay loans to other European nations that had helped to finance their war.
Stavros Thomadakis, professor of business economics and finance at Athens University, admits:
“In a way, debt is Greece’s original sin”.
It comes as no surprise, then, that once again Greece faces an insurmountable public debt that threatens the stability of the European Union, European markets, and accordingly, United States markets. Though its economy is valued at a relatively small $350 billion, it’s debt totals $450 billion. The June 18th issue of the Economist magazine reports that Greece’s debt will rise to almost 160% of its GDP.
Last year, the European Union attempted to bail Greece out with a 110 billion Euros ($158 billion) stimulus package, to be delivered to Greece over three years. As America has experienced, however, these solutions aren’t permanent.
There are many reasons why the debt has accumulated. However, European Union membership has only caused further damage for Greece. Attempting a monetary union without a united political foundation, such as the EU, may be beneficial in certain circumstances.
For example, the EU has helped productive nations with high export levels by avoiding cumbersome currency exchanges and enhancing price stability. For Greece, however, European Union membership hasn’t helped their debt situation for a couple of reasons.
1. Lack of Greek Flexibility
As the Economist magazine stated:
“What determines whether a country can survive, let alone thrive, in a monetary union is flexibility in both labor and product markets.”
Greece lost this flexibility when it joined the European Union. Now that they operated on a uniform currency, devaluation was no longer an option for realigning costs—a vital strategy for combating rising prices.
2. Borrowing Made Easy
When the German, Portuguese, Spanish, French and Greek banks were suddenly operating under the same currency, two things happened: exposure to each other’s national economies skyrocketed, and exchange-rate risks were suddenly eliminated.
These both led to a large amount of lending since the stronger economies suddenly had a vested interest in keeping the weaker economies running. Long term, however, lax practices were adopted. Portugal’s pathetic growth was overlooked, Greece’s poor public finances were forgiven, and the loans were made anyway. This lending caused debt to pile up in the borrowing countries—namely, Greece.
3. Influx of Cheap Imports
One of the main benefits to joining the European Union was the single market that it provided. Common economic policies allow the freedom of movement for goods and services. Tariffs are removed, taxes are lowered and technical barriers are lowered. For large manufacturing countries, this has been key to growth. Slovakia’s industrial production, for example, has risen by an enormous 43% over the past 5 years, according to the European Commission 2011 Forecast.
For Greece, however, with the lowest exports-to-GDP ratio in the euro area, this is bad news. European Union membership now meant that countries could ship huge quantities of cheap goods to Greece, thereby undermining the little production that Greece has/had. The European Commission accordingly reported that Greek industrial production fell by 16% since 2005.
These three factors all led to the debt crisis that Greece faces now. Sadly, it shouldn’t come as a surprise. Greece didn’t belong in the European Union to begin with. When the Maastricht summit created the European Union in 1991, one of the key criteria for membership was a budget deficit ceiling of only 3% of the candidate’s GDP.
A no bailout policy was adopted as standard procedure. Yet, Greece was allowed to join in 2001, after misreporting their deficit ceiling, according to the BBC, and has since required a massive bailout.
As Jim O’Neill, chairman of Goldman Sachs Asset Management, reported:
“In hindsight it might have been wrong to have allowed so many countries to join the eurozone so easily. As many of the skeptics suggested back before 1999, it would turn out to be a major error. Eurozone membership for such vastly different countries doesn’t appear to be particularly optimal.”
Euro zone members are working on a solution, called the Europe Stability Mechanism (ESM). It is supposed to be different than a bailout and is supposed to reflect the bloc’s determination to shore up the currency’s stability. We will wait to see if and how this helps the Greek situation.
Related Posts:
