Observation Deck

How Greece Fell into the Eurozone Trap

How Greece Fell into the Eurozone Trap

Sometime in the early 1980s, my husband’s uncle Nick began to dream. His language school in Corfu was bustling with students eager to learn English or French or German before Greece joined the European Union. So Nick expanded the school. Then, buoyed by his success and the ready availability of drachma-based loans, he borrowed money to build a sleek grocery store; a motorbike rental agency followed. In 1992, on the eve of the EU’s creation, Nick was a wealthy man basking, like most Greeks, in the presumed prosperity of an economically united Europe.

Today, both Nick and Greece are bankrupt. Between 2008 and 2013, Greeks saw median incomes plummet 22 percent. More than 25 percent of the labor force is now unemployed, including Nick, his ex-wife, and their only son. Between October 2014 and March 2015, Greece experienced capital outflows of almost 28 billion euros, and its newly elected leadership has had little luck in gaining any debt relief from European creditors.

It is easy, in retrospect, to blame Nick and his compatriots for borrowing and spending too much (which they did) and for skirting their fiscal responsibilities and believing too glibly in the glories of union. But the source of Greece’s demise goes far beyond its own bad behavior and the harsh austerity that other Europeans have thrust upon the country. To put it bluntly, Greece never should have joined the EU in the first place—and it shouldn’t be trapped there now.

In the early 1990s, Greece fell far afield of the economic criteria laid out by the Maastricht Treaty, the EU’s founding document. Greece’s 1991 inflation rate, for instance, was 20 percent against a Maastricht target of 3.9 percent, while its government deficit was 11.4 percent compared with a target of 3 percent. In 1999, when the European monetary union was launched, Greece failed to meet the criteria again, but managed to squeeze into the body two years later. A decade on, when the financial crisis hit, Greece was running double-digit fiscal deficits and had accumulated debts worth nearly 130 percent of the country’s GDP. It had not addressed underlying structural problems, including spotty tax collection, business-choking regulations, and a vast, inefficient state bureaucracy. Since then, the country still has not summoned the political will to redress these issues.

To understand why Greece’s entry into the EU was so problematic and yet so preordained, one must go back to the political dream, hatched in the immediate post-World War II period, of a continent free, at last, of war. Originally, the EU was seen not as a seamless financial market or even a free trade zone, but as a space for political and social cooperation. As Jean Monnet, the EU’s original architect, expressed it: “What we must seek is a fusion of interests among the European peoples.” Greece, with strategic links to the United States and NATO and with an iconic status as the birthplace of democracy, was an integral slice of this political vision.

Over the course of the 1960s and 1970s, however, a new generation of European leaders moved away from their predecessors’ political pronouncements, focusing instead on economic and financial motives that might bring nations together. This tack worked: Corporations based in smaller countries such as Belgium and the Netherlands jumped on the European bandwagon, lured by the prospect of larger markets and lower continental costs. Financiers embraced the idea of cross-border mergers and simpler tax regimes. And ordinary citizens like Nick broke from their customary nationalism to embrace a vision of free-flowing trade and widespread wealth. (Of course, the Greek government—along with administrations in Portugal, Spain, and Italy—was also eager to receive funds from wealthier European partners.)

On its surface, the EU thus looked like a great success. But once the financial tide turned, the monetary union’s rocky foundations became perilously evident. As Greece, among other countries, has stumbled since 2009 under a burgeoning debt load, growth has slowed across Europe and anxiety has spread.

Economically, Greece is of little import to Europe. Even if the country were to default entirely on its debt, the total sum would be minimal (320 billion euros, or around $350 billion), and the creditors would be primarily EU funding entities, which would not be affected severely by the loss. Politically, though, the country remains key to the EU—not only because the rise of its deeply socialist Syriza party threatens the continent’s prevailing neoliberal consensus, but also, and more importantly, because its lack of exit options is Europe’s as well. Or to put it more bluntly, if there’s no way out for Greece, then there’s no way out for anyone.

In what could be called an act of political genius, the EU’s creators compelled nations to cede chunks of their sovereignty—printing money, patrolling borders, regulating economic exchange—to a supranational body. If the terms of that great bargain were constantly up for renegotiation, the EU never would have worked. So the founders explicitly concocted a no-way-out scheme. It’s not that the rules for retreating from the EU are complicated, harsh, or expensive. There simply aren’t any. To even begin contemplating leaving the eurozone, at a bare minimum Greece would have to start printing drachmas again, recalculate all prices and assets denominated in euros, and hope to raise funds through bonds that could only be issued at astronomically high rates. Undertaking these tasks during a period of prosperity would be exceedingly difficult; doing them under duress would likely prove catastrophic.

Therefore, the fight between Syriza and the European troika, and between Germany’s Angela Merkel and Greece’s Alexis Tsipras, isn’t really about these entities and leaders at all. It is about a political decision made decades ago to execute a vision of a unified Europe that would never be subject to the vagaries of member states—and about the long-term consequences of trying to pretend that Greece was ever something it is not.

Illustration by Matthew Hollister