Greece has committed to more austerity and arduous reforms to keep the euro, but success requires equally significant but unlikely changes from Germany.
Since 2010, Greek taxes are up and government spending is down a combined 20 percent. As freshman macroeconomics would predict, that pushed down GDP by more than 25 percent and raised Greece’s sovereign debt to GDP ratio from 130 to nearly 180 percent.
To bring debt under control, Greece must accomplish budget surpluses of at least 3.5 percent of GDP and annual economic growth and export surpluses of more than 4 percent through at least 2030.
That’s the macroeconomic equivalent of completing a 70-yard touchdown pass in the final moments of the Super Bowl. Doable but highly unlikely without help from the opposition—for Athens that’s Berlin.
To attract investment, stimulate growth and generate exports, the bailout program relies on economic reforms—making Greek labor markets more flexible and infusing more competition and efficiency into product markets such as for air and ferry transportation, energy, pharmacies and manufacturing.
The Eurozone is growing at a snail’s pace, and only this summer did GDP match pre-financial crisis levels; consequently, it has most of the capacity needed to meet customer demand for manufactures and tradeable services.
It is one thing for Greece to attract investment to add to European capacity when markets are expanding but quite another to persuade businesses with entrenched facilities in Bavaria to move those to the outskirts of Athens.
Some sectors, such as the rapidly changing information technology sector, do create new investment opportunities in Europe. However, although Greece’s universities can train civil engineers to modernize its infrastructure and chemical engineers for its booming petroleum refining business, Greece is hardly the place to study computer and software design—any nation needs those propagate high tech.
Efforts to reform hidebound Greek universities are meeting considerable opposition, and cultural resistance to reforms—whether it’s for bakeries or electric utilities—runs deep in Greece.
Bailout mandates to streamline markets and foster competition would face similar barriers in Germany. It too has hamstrung labor markets—industry wages are negotiated on a national basis leaving limited latitude to accommodate variations in local labor markets and it has the lowest average work week among industrialized nations. Economists generally criticize rules that hinder competition in German markets such as insurance and legal services, and those shut out opportunities for foreign products that Greece needs to accomplish export growth.
Greece’s debt problems and export growth challenges are part of a more generalized European problem—the average interest payments on sovereign debt among bailout recipients Portugal, Italy Greece, Spain and Ireland exceeds 4 percent of GDP and most debt is owed to foreign governments and creditors. Hence, those must accomplish huge export surpluses just to meet interest payments.
That can’t happen as long as the euro is overvalued for bailout countries and undervalued for Germany and other northern Eurozone economies, which enjoy trade surpluses and lecture Mediterranean states about the need to buckle down to Germanic market purity and hard work.
That’s why Greek wages have fallen 25 percent and youth unemployment is nearing twice as much, yet it can’t attract enough investment and the export growth to bring down its debt. And the same applies in some measure to other Mediterranean states.
Until the Nordic states led by Germany let go of their mercantilist economic strategies and set an example for economic reforms, the southern Eurozone countries are damned to high unemployment and chronic debt problems.
Mr. Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets at @pmorici1.