Wednesday, August 20, 2014
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Euro Crisis: The German Approach Is at Least Partially Correct

Structural Reform in Europe is Key for the Euro's Survival

Germany has received scathing criticism from many experts for its approach to resolving the euro crisis. Germany has been trying to: limit/reduce government budget deficits and promote large-scale structural reform (e.g., improved international competitiveness in the European periphery, create a central authority to manage Europe-wide finances with real enforcement powers against national governments, etc).

A common and vehement criticism is that, to avoid a 1930s-scale economic collapse, Germany and the core euro countries (e.g., Finland, Netherlands, etc.) must shift from an austerity approach to aggressive pro-growth policies. They're urged to: recapitalize weak European banks, create a European bank deposit insurance system, promote fiscal stimulus in place of austerity (implying a mechanism for periphery countries to borrow with a German guarantee), weaken the euro against foreign currencies, and accept some euro inflation. Structural reform (which the Germans view as a top priority) is considered of secondary importance by Germany's critics, to be addressed only after the current crisis is averted.

The hour is late. Unemployment in some euro countries is at Depression levels (in Greece and Spain, unemployment now exceeds 20 percent). The collapse of the euro and the European common market -- which would be economic catastrophes -- are being openly discussed. Further, a 1930s-style Depression could also lead to political disasters. The 1930s weren't just an economic disaster -- they set the stage for WWII.

However, the harsh criticism of Germany's approach misses the extent to which corruption, demagoguery and governmental incompetence in Europe's periphery are significant barriers to: resuming growth, resolving this crisis, and continued European integration. Greece is my example, but the issues described below exist in varying degrees across Europe's periphery.

Greece has been in an economic crisis for several years, but its government still hasn't reduced public sector corruption. The elites that benefit continue to resist change. For example, paying bribes (to Greek hospitals to obtain treatment and to tax inspectors to evade taxes) reportedly remains a common practice. The public has very little belief in the honesty of the public sector -- "six Greeks in ten expect public officials to abuse their position for personal gain."

Well into the crisis, the Greek parliament retained all sorts of perks for itself (e.g., free Mercedes) while demanding sacrifices from common citizens. In Greece and other countries of the euro's periphery, violent ultra-nationalist political parties gain in popularity, and rumors connect them with the old corrupt elites.

These aren't just anecdotal reports in the press. In Transparency International's 2011 annual ranking of public sector corruption, New Zealand ranked 1st (the least corrupt country in the world), Germany ranked 14th, and Greece ranked 80th (tied with countries such as El Salvador and Morocco).

Consider another metric: In the most recent World Bank Ease of Doing Business Survey, the easiest country for doing business is Singapore (ranked 1st), with Germany ranked 19th. Greece is ranked 100th (just ahead of Papua New Guinea). Apparently, it's easier to do business in the Republic of Yemen (ranked 99th), than in Greece. As one simple point of comparison: In Greece, it takes 77 days (and probably a few bribes) for a business to turn on electric service; in Germany, it takes 17 days.

A free press is key in fighting public sector corruption. But across the euro's periphery, freedom of the press is weak and often under attack. For example, Greece ranks 70th on the most recent Press Freedom Index, behind Bhutan and ahead of Nicaragua. As a benchmark, Finland ranks 1st with the world's freest press; Germany ranks 18th.

I have huge sympathy for the Greek public (and the other peoples in the Euro's periphery) who suffer from this corruption, are disgusted and want change: "Only one Greek in ten says they see enough corruption prosecutions or strong enough punishments for offences". However, Greece's governing elites - rather than tackle popular reforms such as fighting corruption (that might adversely impact themselves) - have focused instead on unpopular moves, such as pension fund reform.

This wasn't supposed to happen. Countries on the periphery were supposed to converge to euro core standards. However, the periphery's ruling groups resisted fixing corruption problems during the pre-crisis boom, and resist fixing them now despite the crisis engulfing their people.

Germany/the core, as a consequence, prefers to tightly control bailout terms -- to continually pressure the periphery to reform. Otherwise, emergency loans will become gifts, temporary subsidies become permanent annual transfers, and structural reforms will again be postponed indefinitely. Aside from the risk to the German taxpayers, a failure to come out of this crisis with real reforms sets the stage for an even bigger debacle at a later date.

The Germans deserve commendation for their commitment to a united Europe. It's amazing that Germany continues its efforts to achieve a greater fiscal, regulatory and political union with strong non-corrupt transparent institutions. However, it's also amazing that, several years after this crisis began, the countries in the euro's periphery can continue to resist real reforms.

The Germans are correct -- structural reform cannot be put off any longer.

I invite you to follow me on Twitter at: @Steven_Strauss or on Facebook at: https://www.facebook.com/Steven.Strauss.Updates

About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2012. He has a Ph.D. in Management from Yale University and over 20 years' private sector work experience.

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  1. Portrait of Steven  Strauss

    CommentedSteven Strauss

    Hi, first - thank you for commenting. Regarding apportioning blame. It is a hard question, and I can't claim to know the private discussions. However, publicly various officials (most notably the IMF's C. Lagarde) have expressed frustration with the level of Greek corruption.

    Btw I don't agree that it is that hard to reduce corruption, particularly given the reported level of public disgust in Greece. I think tackling the corruption/inefficiency issues would be quicker and easier, as opposed to some of the other things that are happening. And, tackling corruption would have built public support for real reforms in other areas (again, just my opinion).

    With thanks for your thoughts.

    Best s

  2. CommentedMaciej Grodzicki

    Dear Mr Strauss.

    well, is it really that amazing? Real, structural reforms - ones that would improve business environment, reduce corruption etd. require time, patience, knowledge and complex preparations. They are all about institutional and even cultural changes - and those rarely happen immediately.

    And, instead of such reforms, where was the focus of Germany, European Commision and IMF? They put pressure on the quick, harsh austerity, defined in a simplified way. No suprise that what Greeks did was to cut pensions and wages in the public sector - which only reduced effective demand and did little real good for the economy.

    Don't you think that part of the blame for no real reforms in Greece, we should put on Germany as well?

      Portrait of Steven  Strauss

      CommentedSteven Strauss

      Apologies, I responsed to your comment, but not via the reply feature. But the response is at the project-syndicate website. Thank you for your thoughts.

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