April 30th, 2010
12:14 PM GMT
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It is a complicated puzzle that has taken months to put together - and a few critical pieces are still missing

Greece has been negotiating the terms of a European Union bailout since the end of last year and in that time interest rates and the cost of borrowing have soared.

At a press briefing in Davos at the end of January, I remember asking Greek Prime Minister George Papandreou if Germany and France would lend their political support to his country. His answer - like the countries at the time - was non-committal. France did come on board; Germany is just warming up to the idea.

We know at this juncture that the road ahead for Greece is a painful one. We are looking at one out of five government jobs being eliminated. The coveted 14-month salary for government workers will be cut and taxes will continue to increase to  close a 13.6 percent budget deficit from 2009. The target for 2010 is cut of almost five percent, which is incredibly difficult to deliver when your economy is still contracting.

Left out of today’s debate is why we are in this position in the first place.

The reality is that the architects of the Euro made a political decision to be inclusive with the new currency union probably a full decade ahead of actual convergence with Greece, Spain and Portugal - dare I say even Italy, a G-8 member.

As a result of being pegged to a single currency and therefore German monetary policy, the Greeks have enjoyed the full benefits of a strong and stable currency without - until today - any of the pitfalls. Most notably, real estate prices and wages have continued to rise over the past decade, without the necessary openness and flexibility to attract foreign direct investment.

Greece trades a great deal with its southeastern European neighbors - especially in food stuffs. But the country cannot live on olive oil and the food sector alone.

During an interview with CNN, Papandreou talked about developing a green economy and tapping the growing market for solar energy. Practically speaking, it makes sense, but the building blocks for reforms need to be put in place first.

I spoke to one leading Greek businessman who produces high-tech software and sensors from his manufacturing base outside Athens. He recognises the burden of the budget deficit and the mess left over by the previous government. We have seen the protesters on the streets. But he notes - and the polls reflect this - that those shouting the loudest are in the minority. The Prime Minister still has a majority of the population, which supports change.

But herein lies the caveat: The International Monetary Fund is pushing for steep budget cuts and reforms. Papandreou with the support of his European counterparts can use this opportunity to start and complete what should have been done more than a decade ago. As one Greek chief executive said: “Better a showdown with the extremists today than a slow death of our economy in the future.”

Business leaders talk of opening up the property sector. The government and the Church of Greece reportedly own and sit on €250 billion of real estate.

Selling some of those assets would help bring down the deficit and ease the unrealistic level of prices brought on by the single currency. Secondly, many sectors remain closed or overly controlled in Greece. The transportation business lacks competition and prices remain artificially high - thanks again to the strong euro.

No one wants to see Greece exit the single currency. An exit would be a failure for Greece and the European Union as a whole. As one executive noted this past week, “it is absolutely not an option.” If that option is off the table, the Prime Minister has few cards to play at this juncture. Job cuts, higher taxes and yes long-term reforms need to take place for the country to rebuild confidence after the crisis.

soundoff (8 Responses)
  1. David Ahuchaogu

    Greece should be supported by his bigger brothers. The fact is that in the journey of life its impossible for people to move at the same pace. Some will crawl, others will run while some will fly. I believe the protagonist of the European unification did their home work very well in weighing the pros and cons of such excercise before ever venturing into. What Greece is going through right now should not be seen as an abnormality, but rather as a challenge that must be overcomed. She needs all the support she can ever get especially from her partners. EU will become a laughing stock should Greece introduce her own currency or in a worse case scenerio pull out of the union. Think about it!

    April 30, 2010 at 7:04 pm |
  2. Carlos

    The main problem with the Euro area is a single currency, but without true central economic integration for flow of funds in times of need. Each country is left to their own devices for true economic growth, while being subjected to a central bank's rate (by the European Central Bank, ECB), even if that rate is not in tune with the country's situation. The Euro area is/was an attempt to bring together a market place that could rival the US market place which has true integration. Not all states in the USA fare equally in today's crisis, just look at California and Florida. Yet, the USA does not let those states wither and die if they happen to be in dire need. There should be more central budgeting taking place in the Euro area, in order to collect funds from member states, to then redistribute as required.

    May 2, 2010 at 5:19 pm |
  3. Oscar D

    As a European I feel for the monetary union. It gives me hope that Europe is regaining some of its vision and willingness to act. It is also a symbol of peace, unity and prosperity.

    Whether from a more pragmatic perspective it is good for a country to be in the euro or not seems to come down to whether one wants to a part of the single market or not. If there were a fully functioning single market the imbalances would presumably, as Carlos says, be much smaller. My impression is that the key hindrance for the free flow of people in Europe is actually the multitude of languages. Dare I say we should adapt English (British or American) as the official business language?

    May 3, 2010 at 5:18 pm |
  4. lisaweyn

    Europe cannot afford to leave Greece in the cold. It has to help.

    May 3, 2010 at 11:31 pm |
  5. yani

    Greece is down,becouse they been spending much more than they can afford it.Why other european nations has to pay for them.Greece should be kicked from E.U right now.

    May 5, 2010 at 4:19 pm |
  6. James

    The reality is that the northern states have been very harsh on Greece. At the end of WW2, the Northern States had colonies to plunder, Greece though was plundered, first by the Germans and then the Amglo countries. Greece also has external threats that the Northern states can not comprehend. Turkey continously violates Greek airspace and has amassed 600,000 soldiers on Greece's border, and the EU says nothing. Then comes FYROM, without doubt the most disgraceful example of a communist created artificial state. It is intent on hijacking Greece's cultural heritage and history and plagiarising Greek Macedonian history and has an expansionist foieign policy which could engulf the Balkans one day. Yet, the northern states stay quiet. I agree that Greece needs massive economic and social reform, but it also needs European solidarity and support, not ostracism.

    May 7, 2010 at 5:47 am |
  7. Smith in Oregon

    I do agree with a portion of the growing anarchists movement in Greece in their global view of the illusion that is dissolving democracy:

    In a democracy, Money is King and rules the growth and direction of democracy, laws and its lawmakers.

    When a nations currency is NOT backed by a solid commodity such as Gold, Silver, Land Standards on a 1:1 basis then that currency is entirely artificially inflated and has no inherent worth behind it.

    AND as the illusion of a nation's currency value is exposed, the Democracy that Nations currency supports and props up is exposed as artificially propped up as well, ethereal and based on illusion.

    May 7, 2010 at 11:51 pm |
  8. Joshua Zwart

    Meanwhile are the people of the North European countries wondering why they should pay the bill of the Greek who obviously couldn't be counted upon to run their own country. It is not so much the economic reality, but the feeling of being pulled down by Greece. This give people a uncertain feeling and make them wonder what the euro is still really worth... In the Netherlands everyone is putting its money in the bank or (if one can afford) buying gold. I have choosen te put my money in a savings account of one of the numerous banks we have. http://www.alles-over-sparen.nl helped me choose one.

    June 7, 2010 at 8:47 am |

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