Greece’s issues – which are of its own making – primarily consist of an escalating tax problem, an inflated and inefficient public sector, overly generous social benefits and an expansive wage policy. As a result, its level of newly accrued debt stands at a level of at least 12 per cent of the gross domestic product (GDP), while its debt-to-GDP ratio has reached a level of 120 per cent. Whether these figures are correct is a whole other story. After all, Greece’s tendency to understate deficit numbers borders on a methodologically justified system. Had the calculations been made on the basis of the correct figures, Greece should have been denied membership to the Eurozone. But this “creative bookkeeping” continued after it joined the monetary union, which lead to Greece overstepping the deficit limit enshrined in the Maastricht treaty year after year, without having to face any of the sanctions set out in the Stability and Growth Pact (SGP) – supported even, by the inefficient mechanisms of the SGP.
Are the other Eurozone countries allowed to help? Should they even help? At first glance, the answer to that question seems to be a clear “no”. Article 103 of the EC Treaty specifically states that the Community shall not be liable for the commitments of central governments. In this case, the emphasis is on “liability”, which means that we do not have to help. But are we allowed to? Under certain conditions, yes. Article 100 includes a provision according to which financial assistance can be granted if a Member State “is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control”. Although Greece is mainly responsible for its economic difficulties, we cannot rule out that the dramatic worsening of the situation in the Greek state may have been the result of the global financial crisis, for which Greece cannot be held accountable. Consequently, if we expand the interpretation of Article 100 to the necessary degree, extending financial assistance would indeed be possible from a legal point of view.
So should we help? From an economic perspective, this would depend on the costs of helping as opposed to not helping. If the EU chooses to provide financial assistance, the taxpayers in the European Monetary Union (EMU) would have pay for Greece deliberately choosing to live beyond its means. In addition, there is a risk of creating the wrong incentives with regard to economic, fiscal and socio-political discipline in EMU states. However, if we do not help, this could trigger a chain reaction, as financial investors could pare down their holdings of government bonds from Portugal, which is currently also on the brink of financial collapse. Furthermore, Greek government bonds are currently in the hands of numerous financial institutions located outside Greece, which means that if the state were to collapse, this could undermine the stability we have achieved, or incur exorbitant costs for the EU. Now we have to choose between the lesser of two evils.
First, we should wait for the EU to reach a decision on its strict regulations, and as a plan B, it might be necessary to consider an intervention from the International Monetary Fund. At the same time, the EU legal framework should include provisions on a well-structured insolvency procedure for EMU members.
The Greek population will have to live according to Spartan virtues: self-discipline, simplicity and austerity.