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Greece’s Tussle with Turkey, Key to Athens’ Economic Comeback?

How can two life-long, sworn enemies who frequently squabble with each other and who almost went to war some 20 years ago over an arid Aegean island be part of NATO? Indeed, Turkey and Greece, the quintessential frenemies of the Mediterranean, have so far waged war with each other four times since Athens won its independence from the Ottoman Empire in the 19th century. Only a 1952 compromise to sever Moscow’s ambitions in the region under which both joined NATO stopped the violence from escalating over the past 60 years.

Even after successive governments, bilateral tensions have never completely eased, still revolving around three main areas of contention: 1) the island of Cyprus, split right down the middle between a northern Turkish side and a southern Greek one; 2) the question of sovereignty over 16 islands and islets in the Aegean sea; and finally 3) the fate of the massive oil and gas resources locked in the eastern Mediterranean which are estimated to be worth several trillion euros.

Spurred by what it perceives as an existential threat to its national security, Athens has been one of the biggest spenders on military defense in the EU as a percentage of GDP.

In fact, even in the throes of its economic meltdown, Greece averaged expenditures of 2.5 percent on defense over the past 5 years, almost on par with funds spent on education, and above the 2 percent threshold demanded by NATO.

Even the populist government of Alexis Tsipras, going back on pre-election promises, refrained from taking an axe to the country’s sizeable defense budget and even signed a €500 million deal to upgrade five ageing US-made P-3B Orion maritime patrol aircraft. The planes, vital for monitoring Greece’s maritime border with Turkey, were supposed to be replaced in 2010, but lenders forced Athens to drop its plans. “How come the government is spending €200m to tackle the humanitarian crisis and €500m for defense?” asked Stavros Theodorakis, an opposition figure. Luckily, the contract has been handed to Greek companies, which means that the money will flow back into the Greek economy, create jobs and increase tax revenues – a smarter way to turn on the country’s economic taps than by simply distributing handouts.

Excessive austerity measures, apart from causing a looming humanitarian crisis in Greece, have also made the country’s industry fall into disrepair, further reducing the chances of Athens ever achieving sustainable, non-credit driven growth. For example, Greece’s capable defense industry has languished, shedding jobs as its factories rusted away. The trend must be reversed. Athens used to be a major manufacturing powerhouse, thanks to its unparalleled expertise in shipping and ship building. Now, Greece has the world’s largest merchant fleet but is in the awkward position of not being a manufacturer of any type of vessel or component. “We’ve seen chronic shortages of spare parts and vessels being cannibalized to keep others afloat,” one officer of the Greek navy bitterly remarked.

The government of Syriza has a chance to change all that. Elected on promises of putting an end to austerity, raising social benefits and creating 300,000 jobs, Alexis Tsipras could in fact put some of his brazen rhetoric to good use. Since Greece’s defense budget is still considerable even after successive reductions, and since the tensions with Turkey are forecast to stay at a simmering level for the foreseeable future, Athens has sufficient funds allocated for modernizing its army. Moreover, since the economy is foundering under the weight of its €360 billion debt, it’s obvious that the government cannot simply increase public spending. But what it could do on the other hand would be to hand out contracts to companies that work in Greece and that employ Greek workers.

Take the Greek Navy. Four of its 12 frigates are in a dire state of decay prompting the government to allocate €400 million for their mid-life upgrade. Economically, the contract should be given to the iconic Hellenic Shipyards, who built the frigates in the first place. Why? It’s a simple trickle down economics principle at play: Greek money is used to stimulate the Greek industry, creating Greek jobs and pushing up growth in the process. The economy would expand in a sustainable way, along the lines of the German model based on the manufacturing of industrial goods.

The harsh austerity measures enacted so far by Athens at the behest of the Troika have succeeded in improving the country’s competitiveness. However, the subsequent export-driven economic growth that should have cushioned the steep decline in living standards never happened. Remarkably, Greece is still exporting less than it imports.

Even if the country never had an export-driven economy, relying instead on tourism (which provides almost a third of GDP), state-driven demand for industrial goods could turn that around and open up the Greek economy. There are precedents for this throughout history – both Korea and Japan gradually evolved from manufacturing low quality goods before becoming leading high tech powerhouses.

A good place to start would be to allocate the vast sums of cash already put aside for the modernization of the Greek military to companies that would spend the money in Greece. Doing so would kill two birds with one stone: on one hand it would reinforce national security at a time when Turkey is becoming increasingly resolute in the Mediterranean, while also creating some much-needed jobs.

Of course, this would not be a cure-all, but merely a stopgap measure. The lesson for Tsipras’ government is that there is no need for pointless patriotic grandstanding with the Troika in the name of creating jobs and restarting economic growth. Athens should simply look inwards for solutions instead of blaming its international creditors.