What Kind of Growth for Europe? Lessons from Greece

As uncertainty is spreading across the Eurozone – with Greece as the litmus test – it is necessary to reconsider the causes of the crisis and the possible ways out. The standard set of explanations for the causes of the crisis points to the faulty design of the EMU, while more growth is presented to the public as the best solution. Economic growth, although desirable, does not answer the question what kind of growth Europe needs in order to promote sustainable socio-economic growth and development. To address this complex issue, I will outline two alternative models of growth.

The greek model of growth before the crisis

After the introduction of the euro Greece experienced growth rates above the EU average, and the standard of living in Greece improved considerably between 2001 and 2007. The Olympic Games of 2004, Greece’s win of the Euro 2004 football championship, and the Eurovision contest of the same year gave Greece a highly positive international image. However, when in 2008 the bubble burst and the global financial crisis set in with the collapse of Lehman Brothers, grave structural weaknesses of the Greek economy were revealed, and the Socialist government failed to address them.

The structural weaknesses of the Greek economy – the results of a model of growth that Greece began to follow in the early 1980s – included: 

1) a public sector that is bloated, inefficient, highly unionised, based on clientelism, and with a high deficit, including numerous subsidised, loss-making state-owned enterprises
2) overspending resulting in continuous deficits and a growing public debt
3) an overregulated economy with an inflexible labour market as well as closed product and services’ markets – resulting in a deteriorating investment climate
4) the unfavourable structure of the economy with declining industrial production, overdependence on revenues from services (mainly shipping and tourism), growing imports, a worsening trade balance, and a growth based mainly on credit-fuelled individual consumption.

The decline of Greece’s competitiveness is thus the result of several factors. On the one hand, the cost of labour increased, while productivity declined. On the other hand, while Greece’s European and international partners deregulated and liberalised their economies, Greece’s system of clientelism meant that due to the high political cost involved very few (if any) market-oriented reforms were successfully introduced in Greece before 2012. Moreover, Greece was characterised by an imbalance between state and private economy, an imbalance that meant, on the one hand, that the latter had to support a dysfunctional and continuously expanding public sector, while, on the other, it was increasingly squeezed by overregulation with private actors being pushed out of the market.

This particular model of growth that, to a certain extent, resembled a command economy was unsustainable – as became apparent during Greece’s present crisis. The fate of the two loan facilities, generously offered to Greece in 2010 and 2012 by its international partners, remains uncertain precisely because the Greek economy is hostage to the malicious economic (and political) model of the past. Particularly worrying in this respect is the fact that the debate on Greece’s crisis is overshadowed by the overblown attention awarded to the problem of tax evasion – which curtails the debate on how to transform Greece’s economic system and develop an alternative model of growth.

An alternative model of growth

A lesson from Greece’s dilemma is that an alternative model of economic growth, one consisting of two interconnected pillars and conducive to socio-economic development should be applied. On the one hand, fiscal discipline is necessary – and this has to be kept separate from political campaigning and the cronyism that goes along with it. On the other hand, the state should abandon its overbearing role in relation to society and markets and be content with that of a smart regulator and a promoter of private initiative instead. No doubt, such measures will have to be tailored to the needs of country-specific social, political, economic, and ideological circumstances, and it will be necessary that such an alternative model of growth is supported through EU-wide structures, policies, and strategies.

When firmly rooted in a country’s legal system, fiscal discipline is an important tool for limiting the degree to which a country’s finances are siphoned off for party political purposes, that is, cronyism. This, in turn, can produce economic stability and, if combined with a simple and transparent tax system with low tax rates (preferably in the form of a flat rate tax), and with fiscal discipline will likely result in a predictable business environment and thus improve a country’s overall investment climate.

In addition, if the state’s role is limited to that of smart regulator and agent for incentives, it will be less vulnerable to manipulation by public or private interests. By limiting the size of the public sector as well as by outsourcing several of the traditional functions of the state to private agents, expenditure can be cut significantly, the quality and efficiency of services can be improved – and as a result the tax payers’ money will be employed with greater responsibility and for the greater good of all. Areas where it is of particular importance that the state play the role of a smart regulator include: 
1) an industrial policy that promotes up-stream and down-stream innovation[1] as well as ‘smart specialization’[2]
2) a competition policy to safeguard free product, services, and labour markets 
3) family policy 
4) education
5) environmental policy.

All of these areas are the sources of sustainable socio-economic growth and development.

It is crucial that the EU’s growth strategies do not promote growth per se but are aimed at these fundamental factors for prolonged and sustainable socio-economic growth and development. At the same time, it is equally important that country-specific factors are thoroughly investigated and measures tailored to a country’s problems and needs. As we have seen, quick fixes proposed by key EU actors – fixes based on poorly conceived strategies – tend to promote negative stereotypes about the member states in need of support.

Footnotes:
[1] For an excellent argument in support of this thesis see: Aghiou, P., Boulanger, J., Cohen, E. (2011) ‘Rethinking Industrial Policy’, Bruegel Policy Brief, Issue 2011/4, June 2011.