To fix the Greek crisis, deal with the eurozone’s imbalances

By Tony Barber*
Financial Times, Brussels Blog 1-2-2010

The expression “it never rains but it pours” may seem inappropriate for a Mediterranean country such as Greece. But it was the phrase that sprang to mind when I heard last week that Greek tax collectors are planning to go on strike in protest at the government’s austerity measures. Like the political manipulation of budget data, the inefficiency of the tax system is one of the Greek state’s most glaring weaknesses. How will a tax collectors’ strike help matters?

That said, I do not share the view of German and French government officials who insisted vehemently last week that the solution to Greece’s problems lies almost entirely with the Greeks themselves. If this were the answer, nothing would be simpler than for the Greeks to roll up their sleeves and get on with a 10-year programe of wage restraint and productivity growth.

The truth is less pleasant: the Greek turmoil reflects a wider crisis of imbalances in the 16-nation eurozone, and everyone will have to make a contribution to bring this wider crisis under control. Specifically, Greece and a few other countries - notably, Portugal and Spain - have very big current account deficits, while Germany, Europe’s champion exporter and the the eurozone’s largest economy, tends to run big current account surpluses. The Greek deficit was a remarkable 12 per cent of gross domestic product in the third quarter of 2009, and Portugal’s stood at 10 per cent.

For sure, Greece and Portugal need to improve their competitiveness, but they would also benefit from stronger foreign demand for their products and services, especially in Germany. In order to overcome the eurozone’s crisis, it will be as necessary to raise demand in Germany and other surplus countries as to hold down wages and root out corruption in Greece.

This will be no easy task, for just as the mentality of German business is geared to the ruthless pursuit of international competitive advantage, so the mentality of German society is in many respects doggedly attached to the goal of amassing domestic savings. Yet in the long run it would be in Germany’s best interests to reduce the eurozone’s imbalances. The alternative - emergency financial support for Greece, arranged through gritted teeth and against the wishes of a disgruntled German public opinion - would surely be worse.

*Tony Barber is the FT's Brussels bureau chief since September 2007