Greek voters were asked on Sunday (July 5) to vote on the latest terms for another bailout, following a week in which the country missed a crucial debt payment and closed its banks. They said “no,” causing speculation about a possible “Grexit,” or Greek exit from the eurozone (the 19 nations within the 28-member European Union using the euro currency) - even as Greece and its creditors worked on a new accord. Political scientist Kostas Kourtikakis, a native of Greece and lecturer at the University of Illinois, is an expert on the EU and its institutions, as well as on the politics of Greece and the region. He also spent two weeks in Greece leading up to the referendum. Kourtikakis (pronounced kor-tee-KAH-kihs) spoke with News Bureau social sciences editor Craig Chamberlain about Greece, the ongoing debt crisis and the future of the EU.
First of all, what has been the mood in Greece about these developments?
There was an air of division and animosity in the week leading up to the referendum. The climate reminded me of a different era in Greek politics, which many Greeks of my generation had considered to be a thing of the past.
Citizens were divided in two camps that disagreed so much that even their understanding of what is at stake was different. The members of the “no” camp, which included the current coalition government, interpreted the referendum question literally. They were saying “no” to the agreement proposed by Greece’s creditors on June 25, which the government put on the ballot. Though some wanted a Greek exit from the eurozone, I think that most did not. They only wanted a new agreement that would involve less austerity and provide more stimulus for the economy.
On the other hand, the supporters of the “yes” camp, which included most opposition parties, understood the question more broadly, as a matter of whether or not Greece wanted to remain with the euro. An underlying assumption was that Greece’s partners in the eurozone would interpret the vote in the same way. Even though most people in the “yes” camp also opposed austerity measures, they saw these measures as a necessary evil. Despite any short-term costs associated with austerity, they saw eurozone membership as yielding long-term benefits for the country, believing that euro-related reforms make the economy more competitive and prosperous.
Some news reports point out that even if Greece was borrowing and spending irresponsibly before its debt troubles, it has implemented the required austerity measures in recent years, cutting back government spending and raising taxes. But it’s also now in a deep recession, with unemployment at 25 percent. What are its options for digging out of this economic hole?
There are two main views about how Greece can get out of this mess, which are roughly represented in the positions of the two camps. Until now, the view promoted by the EU and the International Monetary Fund, based in market-oriented policies, is that Greece needs to cut public spending even more to reduce its debt. At the same time, the EU and the IMF are asking for structural reforms that will revitalize business, which can make up for the economic activity lost as the government sector shrinks. These reforms include making the labor market more flexible, opening protected products and services to competition, and reducing government corruption and red tape. Further reform of the tax system is also considered absolutely necessary, so the government can reap the benefits of economic growth through tax revenues.
Yet there are experts who loudly criticize the EU/IMF approach, among them prominent American economists Joseph Stiglitz and Paul Krugman. The current Greek coalition government also belongs in this group. They typically support structural reforms, but think that asking a government to cut spending further during a period of prolonged recession is counterproductive. They reason that with a reduction in salaries, pensions and infrastructure spending, incomes then drop, private spending shrinks and market activity stalls. As a result, government revenues in the form of taxes fall even further, and the government finds itself even less able to service its debt. The solution of these experts is economic stimulus, which means actually increasing some forms of government spending or at the very least not reducing it at all.
The EU has been dealing with debt issues for more than five years, and earlier on every new crisis seemed to threaten the entire international financial system. Is that still the case? What’s the worst that can happen if Greece were to leave the eurozone or default on its debts?
For the last five years, the European Union has taken measures to protect its financial sector against a “Grexit,” thus also protecting the international financial system, with which it is closely linked. For example, most of the Greek debt has been transferred from private institutions, such as commercial banks, to government entities, such as the European Central Bank and the IMF. In fact, other eurozone governments now own the biggest chunk of Greek bonds. Moreover, the EU has set up a permanent bailout fund to assist weak eurozone economies that may need support.
But despite the adoption of all these measures, it is impossible to know for sure how well the financial system is really protected, until Greece actually ever exits the eurozone. Moreover, even though private institutions are now more secure, if Greece leaves the eurozone and goes bankrupt, all the governments that own Greek bonds will effectively lose the taxpayer money they now have invested in Greek debt. This uncertainty gives pause to leaders in eurozone countries, some of whom are otherwise tempted to cut Greece loose, because domestic public opinion is turning increasingly hostile toward future Greek bailouts.
More than a few commentators suggest that the euro itself is as much, if not more, to blame for these ongoing debt issues. Can the EU and the eurozone continue in their current form?
There is a fundamental logic behind the EU’s economic union, which has been designed as a decentralized union in which each participating government is expected to follow certain common economic rules. I think the current logic is not going to change soon, not only because it will require a revision of the EU treaties, on which member-states are extremely unlikely to agree, but also because there is no political will to take the EU in this direction right now.
Yet, surprising as it may sound, until the Greek crisis, the EU did not have effective mechanisms to deal with situations like this in which the common rules are not enforced. In responding to this crisis, the EU has been making all sorts of adjustments. One is the establishment of the permanent bailout fund. Another is a new eurozone agreement, dubbed as the “fiscal compact,” that makes common economic rules strictly enforceable under national law. However, I don’t anticipate a significant change in the rules-based nature of the entire system, at least not in the foreseeable future.