European leaders did their best to avoid a clear stance on Greece yesterday. But with a budget deficit of over 12% of GDP, a debt ratio of almost 120% of GDP, an electorate fiercely opposed to the mere announcement of spending cuts, the leeway for tax increases largely exhausted, and European neighbours terrified of the consequences of a Greek default, a bailout is only a matter of time. Yet it will only exacerbate structural flaws at both the European and the Greek level.
In principle, there are two ways to organise a confederation like the EU fiscally. Either each member state retains full fiscal autonomy and assumes full responsibility for its finances, or some form of bailout option is arranged, but at a substantial loss of autonomy for the member states. The EU was originally organised according to the first principle. With the fulfilment of the currency union, it was no longer credible that member states would stand idle if a neighbour went bust. Hence, the Maastricht criteria tried to move the EU closer to the second principle.
Except that absent an enforcement mechanism, they remained ineffective. Big member states softened these rules when required; small member states like Greece ignored them when required. So the EU ended up combining the worst bits of the autonomy principle and the vertical administration principle. “Conditions” attached to a bailout would suffer from the same problem. A bailout would exacerbate the perverse incentives arising from this combination.
Furthermore, the history of Greece since the 1980s shows one thing: it is easy to import the social spending levels of a typical Western European social democracy, but it is not so easy to import Western Europeans’ willingness to pay the corresponding tax level and adhere to the strictures of a big welfare state. The Greek welfare state has become a hotbed of rent-seeking, with middle-class working-age households receiving more in cash benefits than the poor. At the same time, Greece has Western Europe’s largest shadow economy. Apparently Peter Saunders had a point when he wrote that:
“Social democratic welfare regimes […] are probably only sustainable in countries with relatively strong collectivistic cultures.”
In short, there is no point in Greece trying to be Sweden. And there is no point in the rest of Europe subsidising the attempt through a flawed fiscal architecture either.