Wishing Greece Had Never Joined the Euro

Wishing Greece Had Never Joined the Euro
By DAN BILEFSKY
Published: May 4, 2010

ATHENS — It was a harbinger of things to come.

In April 1997, the Greek finance minister, Yannos Papantoniou, implored his European Union counterparts at a meeting in Brussels to print some of the future euro notes in Greek letters. But then a stern-faced Theodore Waigel, the German finance chief, weighed in.

Latin alphabet only, Mr. Waigel insisted. Besides, Mr. Papantoniou recalls Mr. Waigel saying, poor small Greece was in no position to make demands: “He said to me, ‘What makes you think you will ever be in the euro?”’

But Mr. Papantoniou, a Socialist who shepherded Greece’s entry into the euro zone, had the last word. “I replied that Greece would be in the euro and that a poor villager in Greece would never embrace the currency unless it looked Greek,” he said during an interview. “It was a matter of pride. I fought hard, and placed a bet with him then and there — and I won.”

Now, as Greece’s E.U. partners prepare to bail out the debt-ridden country — the first time that the 16-nation euro zone has needed to rescue one of its members — many critics, inside and outside the country, are wishing that Mr. Papantoniou had lost his bet.

Amid growing concern that the contagion could spread to countries along Europe’s southern tier and even infect the Continent’s banking system, Greece’s turbulent recent history suggests that the crisis is, in many ways, a peculiarly Greek tragedy. It is rooted in an ancient country’s epic profligacy and abetted by the hubris of European leaders whose desire for integration at any cost compelled them to allow political considerations to trump economic realities.

By many accounts, Europe’s current plight can be traced to 1981, when Greece, still emerging from the aftermath of a military dictatorship, rushed to join the European Community, 14 years ahead of the much-richer Austria, Finland and Sweden, and five years before Spain and Portugal.

At the time, President François Mitterrand of France opposed the bloc’s southward expansion, fearing that countries like Greece were not ready.

But those in favor of expansion carried the day, arguing that linking countries like Greece, Spain and Portugal to European structures was the best means to modernize their fragile democracies.

For the classically educated leaders of Europe, who viewed Greece as the cradle of democracy, tying the poor Balkan country to the geographically distant western Europe was, Mr. Papantoniou recalled, a “historic mission.”

During Greece’s first decade of membership, Europe’s generous subsidies helped catapult Greece out of its backwardness. By 1997, when European leaders prepared to inaugurate the single currency, some were praising Greece, which was enjoying steady economic growth of more than 3 percent under the Socialist government of Prime Minister Costas Simitis.

For Athens, Mr. Papantoniou recalled, joining the euro was a matter of pride and necessity in that it would stabilize the country’s economy by fending off predatory speculators while allowing Greece access to credit at low interest rates as part of the wealthy euro club.

“Once we were in line to join the euro, we started to transform from a Third World country to one that aspired to look more like Switzerland,” he said.

But Greece’s path to the euro was far from assured. Public opinion in Germany, scarred by the memory of wartime hyperinflation, was wary of giving up the Deutsch mark, and the German government insisted on tough conditions for those countries wanting to join. 

• Budget deficits were supposed to be less than 3 percent of gross domestic product, 
• debt was not to exceed 60 percent of G.D.P. and 
• inflation could not top 3 percent.

In December 1996, the currency’s rules were toughened in a so-called Stability and Growth Pact, intended to fine members that persistently failed to conform. The unspoken intention was to raise the barrier for southern European countries, which were seen as having looser, more inflationary, economic policies.

Germany wanted the fines to be automatic, but other countries, led by France, put the onus of enforcement on E.U. political leaders. (No country, Greece included, has ever been fined even though the rules have been routinely broken by most countries in the euro zone.)

The euro was fundamentally a political creation, which meant that the rules could be bent when deciding whom to admit. So, the 11 countries that locked their currencies in January 1999 — the first stage in the creation of the euro — included Italy, Belgium, Spain and Portugal. Greece failed to join because of budgetary and inflationary woes.

The European Central Bank expressed concern about Greek finances as early as 2000, noting in a report that Greece’s total debt was far above the prescribed limit.

Still, Athens kept up the pressure to be admitted in time for the debut of euro notes and coins in 2002. Mr. Simitis, who had taught at a German university in the 1970s, adroitly lobbied German politicians and bankers, mindful of their resistance.

In the end, Greece joined a year earlier than expected, in January 2001. It had — on paper — sharply reduced its budget deficit. And, while it had not reduced debt sufficiently, it invoked the precedents of other countries, like Italy and Belgium, which had been allowed in despite breaching the limit. The political imperative of keeping the euro on track silenced critics.

“At the time there were clear indications that the Greeks were forging the data, especially data on deficits to make their public finance situation look more benign than it really was,” said Jürgen von Hagen, professor of economics at the University of Bonn. “But European governments did not want to pay attention. For political reasons they wanted Greece in.”

The laxity with regard to fiscal discipline extended to the biggest players in the euro club. In 2002, 2003 and 2004 even Germany and France breached the deficit rules, setting a dangerous precedent.

By 2004, it was clear that Greek economic data was faulty. The Union opened its first investigation into Greece’s deficit. But despite evidence compiled by Eurostat, the Union’s official statistics agency, that Athens had fudged the numbers, Union officials made clear that ejecting Greece from the euro zone was not an option.

Mr. Papantoniou, the former finance minister, blamed the discrepancy in the deficit figures on a change of accounting rules under the center-right government of Kostas Karamanlis, who came to power after the Socialists were ousted in March 2004 and altered the way military spending had been calculated.

“It’s a big lie that the Greeks falsified the statistics,” Mr. Papantoniou said.

Tommaso Padoa-Schioppa, a former executive board member of the E.C.B., recalled that after questions arose about the accuracy of Greek financial data, many countries shot down attempts to strengthen Eurostat’s oversight powers

“The fact is that an opportunity was lost at the time,” he said. “Greece is to blame for its poor management of public finance and competitiveness. But the peers have to be blamed for not doing their job sufficiently well.”

But even apart from the statistics debacle, Greece’s economy soon lurched from bad to worse. Mr. Karamanlis went on a spending spree to prepare for the 2004 Summer Olympics; the increased security costs imposed after the September 11 terrorist attacks in 2001 pushed the price tag even higher.

More broadly, said Yiannis Stournaras, a leading economist and former advisor to the ruling Socialist Party, Greece treated entry into the euro as an invitation to party.

“Instead of cutting the deficit and liberalizing the economy,” he said, “the country continued to spend.”

Governments on the left and the right failed to overhaul a bloated public sector that critics have compared with a Soviet-style system.

“Now we are paying the price for the fact that we lived above our means, with amazing profligacy, and failed to reduce the role of the state,” Mr. Papantoniou said. “Some might say we should have done more.”


Additional reporting was contributed by Stelios Bouras in Athens, Stephen Castle in Brussels and Jack Ewing in Frankfurt.

http://www.nytimes.com/2010/05/05/business/global/05iht-greece.html?ref=business