International Policy Digest

Emerging Voices /13 Jul 2020
07.13.20

The Greek Crisis: How the European Union Got the Euro Wrong

Although Greece’s problems may have begun at home, that doesn’t mean they end there. After decades of widespread fraud, extensive corruption, and reckless fiscal mismanagement, Greece belatedly joined the euro in 2001 in need of a lifeline. With the help of Goldman Sachs, Greece’s government masked its climbing deficits and sovereign debt through currency swaps to meet the newly-formed European Central Bank’s strict requirements, hoping the transition would spur economic growth in the country. The belief was that the new monetary union, referred to as the Eurozone, would dampen inflation, help to lower nominal interest rates, encourage private investment, and remove transaction costs, all of which would allow Greece to better itself.

At the time, it was a glimmer of hope for a country whose government was in a free fall, but instead, Greece’s membership in the Eurozone plunged the country into financial ruin. The country has suffered one of the worst economic crises in modern history and the longest recession of any capitalist economy to date, even overtaking the Great Depression. Greece may have provided the foundation for its hardships, but ultimately, the euro and therefore the Eurozone and European Union, are responsible for its economic collapse.

The necessary aspects of a single interdependent market operating under a standard system of laws and regulations across such varied national economies was not taken seriously when the euro was introduced. The largest flaw with the Eurozone’s inherent infrastructure is that the European Central Bank strictly dictates monetary policy for the entire currency while allowing countries to decide their individual fiscal policies. As a result, it has failed to be an institution flexible and democratic enough to cope, and the lack of flexibility in monetary policy has severely diminished financial oversight and prevented Greece’s stability.

The economic straitjackets imposed on Greece were so blatantly inconsistent with its own financial and political goals as, in comparison to other European nations, the 2008 recession disproportionately affected Greece’s economy. At the start of the Greek crisis, as their fiscal deficits surged, interest rates on debt increased significantly, but the country was unable to reduce them or devalue its currency to stimulate economic growth. The European Central Bank had handcuffed Greece and the country’s membership in the Eurozone acted as a lock on its system. Greece found itself without an adjustment mechanism that could have alleviated the impact of the crisis. Essentially, the Greek crisis was unnecessary, preventable, and could have easily been avoided if the Eurozone’s policies were more suited to support the economic diversity within it.

As the overarching financial entity responsible for a multinational currency and its monetary limitations, the European Central Bank’s main aim has been to maintain the stability of the euro and to keep inflation under control. It has no direct mandate individually concerning the Greek economy that cannot function as efficiently as the rest, and this is also one of its fundamental problems that have revealed the immense flaws in the Eurozone’s economic structure.

By definition, at least from a financial point of view, a successful monetary union is most responsible for the health of its currency, not for its members’ economies. However, that doesn’t mean it should ignore or aggravate them at the cost of it. Despite bailouts from the ECB totaling more than €300 billion euros, one of them being the largest sovereign debt restructuring in history, the money went towards paying off Greece’s international loans and quelling market fears that the Eurozone itself could be dismantled. Thus, the Eurozone has made it clear that the assurance of the euro’s health has occurred at the cost of the well-being of Greece.

As a result, Greece’s real GDP contracted by more than 25%, and the country eventually defaulted in 2015 on a €1.6 billion debt payment to the IMF, making it the first and only developed country to do so. These bailouts only bought time for other European countries and their banks to distance themselves from Greece’s financial problems, which had been displayed by their ensuing actions, as they refused to help the country during the humanitarian crisis that followed. This is a prime example of the issue with the priorities of a non-sovereign, transnational currency – it does nothing to stabilize and support individual members that are struggling but everything to assure and assuage those that are thriving.

Furthermore, Greece has exposed significant fault lines in the Eurozone’s conduct of economic policy and performance. Greece has been a victim of political carelessness and economic negligence at its hands and has been financially drained at the cost of maintaining the euro and in the name of providing the appearance of a united European front in all aspects to the rest of the global community. The euro wants to be a transnational currency that fortifies Europe as an economically strong continent. But, as per the New York Times, the Greek crisis has raised serious questions about whether the “euro is the instrument that shatters the European Union rather than enhances it” – as it should. The Greek crisis should never have occurred, but the euro and its governing bodies made it inevitable.

Having a currency that is dictated by centralized, non-sovereign institutions while also attempting to be independent within separate nations is destined to have more failures than successes. Similarly, having a universal monetary policy combined with so-called “pick-and-choose” fiscal management across such varied national economies is fated to present more issues than solutions. While it seems great when the economy is doing well, financial markets cannot be controlled to the extent of ensuring one currency, in this case the euro, supports all of its members.

The euro’s goal was to display to the world that Europe could flourish as the model for a truly united, interdependent continent after the barbarism and devastation caused by World War II. So, it may be true that the idea of the euro had been developed with good intentions. However, it is wrong to subject a country to such terrible economic circumstances, which have led to an unbelievable humanitarian and migrant crisis, simply in the name of supposed “unity.” It is also impossible to expect such economically different countries to share an abnormally regulated currency if they don’t share anything except for geography. The lengths that the ECB and the Eurozone have gone to in order to stabilize themselves at the cost of Greece should be unacceptable. Furthermore, at a time when the global economy has come to a standstill, and the financial markets are the most unpredictable they’ve ever been, if the Greek debt crisis and Europe’s severe mishandling of it act as anything, it should be taken as a dire warning for what may come in the future.