Small nations have to play by the rules

There is a widely held view that Greece is the victim in the whole sorry mess that has evolved in that country over the past few years, writes Jim Power

In some ways, there is an element of truth in this assertion, but in other ways Greece has been the architect of its own misfortune, just as Ireland and other troubled eurozone states have been the architects of their own misfortunes since 2008.

These countries simply failed to understand the realities and disciplines inherent in locking their currency and general economic systems into a union with larger countries such as Germany and France. The fact that this union was ill-conceived and poorly constructed just served to exacerbate the difficulties.

However, the reality is that if you choose to join a club, you should understand what you are doing and accept and obey the rules of the club as they exist. If you do not like the structure or rules, then you should not join in the first place.

Of course, the political elites in Greece and Ireland could not wait to get on board, but failed thereafter to grasp the realities of what they had committed to.

When a country signs up to become a member of an economic and monetary union, it has to manage its economy and finances in a disciplined way. Interest rates will be set to suit the economic circumstances of the bigger countries. The smaller ones will just have to take the interest rates given and use those tools where it has some discretion, such as incomes policy and fiscal policy, to manage their economic cycle as best they can. The reality is countries such as Ireland, Spain, Portugal, and Greece did not adhere to those disciplines. The results of this mismanagement were cruelly exposed when the global economic and financial crisis erupted in 2007 and basically destroyed the global financial system.

The results of these failings have imposed massive pain on many people, but the Greek situation is particularly tragic.

There were no real surprises at the failure of the Greek government to deliver on its promises and to roll over last weekend and accept the deal that the EU forced upon them. Greece should never have been allowed join in the first place, but the country was allowed to fudge its economic statistics in order to qualify in what was another massive victory for politics over economics. The economy and its people have subsequently paid a very high price for this folly.

Against this background, Greece should leave the system, and it would ultimately be better off doing so and the remainder of the eurozone would be more stable as a consequence.

However, the decisions reached last weekend had much more to do with politics than economics.

For both the Greeks and the EU, it was always going to be essential to reach an agreement that would keep Greece in the flawed system.

At one level, the eurozone authorities would never have been able to accede to the demands of the left-wing government, as that would just give a massive boost to other ‘radical’ parties around Europe, and could seriously alter the European political landscape over the coming years and render EU governance, at least in its current form, virtually impossible.

On the other hand, a Greek exit from the system could push the country into the willing arms of Putin’s Russia, which would significantly increase Russia’s influence in a strategically important part of Europe. The EU would not and should not desire that. Furthermore, the cement that has prevented the eurozone from breaking up has been steadfast political will and a belief in the irreversibility of the whole project.

If one small part were to be chipped off, the veneer of irreversibility would be permanently damaged, and this could have serious repercussions further down the road as regions within the eurozone get into difficulty, as some inevitably will from time to time given the flawed infrastructure of the whole mechanism.

A deal has been agreed, and the uncertainty has abated. However, economically and politically, Greece is in one hell of a mess and we have not heard the last of this Greek tragedy.

Furthermore, the EU is much weakened as a result of the Greek fiasco.

Jim Power

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