The Euro Economy

In a bid to shore up Greece’s anti-austerity position, Prime Minister Alexis Tsipras hosted the leaders of France, Spain, Italy, Portugal, Malta and Cyprus to Athens over the weekend to devise a growth oriented economic policy for the upcoming EU summit in Bratislava. Tsipras is hoping to count on the support of these countries when he goes to the Slovak capital to make his case for lowering Athens’ budget surplus requirement as part of its EU bailout.
Wrapping up the mini-summit on Sunday, a pompously titled “Athens Declaration” revelled in boilerplate language, calling on the cash-strapped EU to double the size of a $350 billion stimulus package for the continent and rehashing some vague commitments about stemming the tide of refugees. For the Greek PM, the meeting clearly presented an opportunity to reassert his anti-austerity credentials after last year’s spectacular capitulation to the Troika’s demands for budget cuts and privatisations in order to secure an €86 billion bailout package for the indebted country.
However, no matter the good vibes coming out of Athens, the fact of the matter is that this impromptu “mini-summit” was nothing more than a PR stunt. First of all, as many-a-pundit have said over and over again, pursuing just economic growth (expressed as GDP growth) is a recipe for disaster, and one needs to look no further then the Union’s two fastest growing economies: Ireland and Romania. Secondly, while austerity has truly hurt Greece’s economy, Tsipras bares a lot of the blame for aggressive anti-business policies that drove away foreign investment.

Mirage of GDP growth

An embattled political leader trying to boost his country’s lagging economy would probably take a look around Europe in search of answers. After all, on account of the internal market and the common currency, it wouldn’t make much sense to try and incorporate South Korea’s industrial policies. Instead, one would likely wonder what made Ireland and Romania the two fastest growing economies in the bloc.
The devil is in the details. The Irish economy, which grew at an unbelievable 26% last year, only managed this thanks its popularity as a destination for “tax inversions.” Described by Barack Obama as “one of the most insidious tax loopholes out there,” an inversion is when a foreign company buys a smaller Irish rival for the purposes of establishing in Ireland, where the corporate tax rate is a mere 12.5% compared to nearly 40% in the US. And as the recent fine levied by the European Commission on Apple showed, inversions are fast becoming unacceptable.
That leaves Romania, a country that has long benefitted from rapid economic growth rates. Bucharest’s economic growth, expected to be 4.2% this year, also comes with caveats. The technocratic caretaker government of Dacian Ciolos, in power since November 2015, has largely benefitted from the windfall created by the previous government’s tax cuts and wage rises for state employees. What’s more, over the past year, Ciolos’ tenure has been fraught with scandal that could prove the record-breaking economic growth just a fluke.
The government is planning to raise social security contributions on workers and impose fresh new taxes. At the same time, the country’s economic growth has not translated to better living standards, as Romanians are still leaving the country in droves and unemployment numbers are stubbornly refusing to inch downwards. Opposition leader Liviu Dragnea has already called on the government to present the status of the country’s “real economic situation”.
On top of this, the cabinet itself is facing the more serious accusation of using the Romanian intelligence service (SRI) to orchestrate a political witch-hunt against opponents under the cover of an anti-corruption drive. By leaning on the SRI and the methods honed by its predecessor, the reviled communist-era Securitate, critics charge that the anti-corruption authorities are setting a dangerous precedent and overstepping their bounds as a caretaker government. With elections coming up later in December, Romania’s economic growth could very well evaporate, especially if Ciolos decides he’d like to stay in power.
Considering the slow growth afflicting the rest of the Union, Ireland and Romania offer two of the only examples the new Athens Club could have pointed to in making their case. Since neither can present an economic alternative that stands up to scrutiny, the Mediterranean leaders (with Tsipras in the lead) will be hard-pressed to offer anything approaching a novel solution. Instead of trying to orchestrate an anti-austerity revolt, they should give some thought to how their own political moves are holding up progress. That holds especially true for Greece.

Tsipras’ hypocrisy

Brussels and Berlin, for their part, are unlikely to entertain talk of reducing Greece’s primary budget surplus requirements until Athens implements the political reforms it has already agreed on. Specifically, they will point to Syriza’s lacklustre-at-best approach to privatisation. A prime example of the less-than-satisfactory progress being made on this front is the sale of Piraeus Port to the Chinese shipping corporation, Cosco, where the Greek government stood accused by the Chinese of altering the terms of the sale before putting it to a parliamentary vote. The vote only passed after the controversial amendments were rectified, an embarrassment for the Greek government and a turn-off for potential investors. In a separate case, the government tried to nationalize and then sell to the Chinese the Skaramangas shipyards, which are currently in the hands of a private investor.

Indeed, there have been so many controversies surrounding Greece’s privatisation process that the head of the Hellenic Federation of Enterprises, Theodore Fessas, has called for a cull of government ministers, citing their leftist ideology and lack of experience as the source of the problem.

It’s politics, stupid!

Ultimately, the Athens group of countries needs to accept that their own political dysfunction, and not German intransigence, bears the lion’s share of the blame for holding back economic growth. Italy is due for a constitutional referendum in November that could leave the country without a government if it fails to pass. Spain faces the prospect of a third general election in one than a year. The French president, despite sitting alongside Merkel at the head of the table, faces a host of internal issues in the run up to elections in France next year, With little to go on and even less to show, the Club Med countries should get their own houses in order before they can expect to be taken seriously at the Bratislava EU summit.

 

 

 

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