Lessons from Greece

The Trojan War is the climax of Greek mythology and the history of ancient Greece. The Achaeans (Greeks), led by heroes like Achilles and Odysseus, waged a war for 10 years on the city of Troy, which eventually fell due to the ruse of the Trojan Horse. There’s no Trojan Horse to save the Greeks in today’s world.

Modern-day Greeks are engaged in a nerve-racking battle with their troika of creditors - the International Monetary Fund (IMF), the European Central Bank and European Union members - after they received 240 billion euros ($266 billion) in two bailout packages in 2010 and 2012 to save the country from default. Leftist Prime Minister Alexis Tsipras and his radical Syriza party gained power in January vowing to renegotiate the stringent bailout terms with the creditors. He made Yanis Varoufakis, an economist and expert in game theory, his finance minister and negotiator.

But the troika was unyielding. The EU members led by German Chancellor Angela Merkel stood firm and shot down any new proposals offered by Athens. IMF Managing Director Christine Lagarde, who cannot risk the bank’s multibillion-dollar bailout going down the drain ahead of next year’s re-election, also remained staunch on the creditors’ condition that Greece must go on with a prescribed set of harsh reforms if it wants to stay in the bailout program and the EU.

The new government refused to accept the troika’s terms for fresh relief funds that included more cuts in pensions, government employees’ salaries and tax hikes. Athens asked for an extension of the bailout to give it more time to reform on its own. Up against hard-line lenders, whom Tsipras accused of “blackmail,” the bold 40-year-old prime minister announced in a national address that the country would hold a referendum on July 5. He advised his people to vote no to the humiliating bailout terms. On Tuesday Greece missed the deadline on a payment of the 1.5 billion euro loan to the IMF and became the first among advanced nations to miss a payment to the 71-year-old international institution.

In a game of chicken in which two drivers drive at each other, one must swerve or both can die. But the one who swerves becomes the cowardly “chicken.” In order not to lose face, one must be bolder and drive at full speed until the other player yields. But that sort of brinkmanship failed to work with the troika.

EU countries have had enough time to build buffers to minimize any shock wave from a Greek bankruptcy. Greece contributes just 1.3 percent to the EU gross domestic product. If the mess does not wreak havoc on the financial markets, the Greek ordeal won’t do major harm to the EU economy. But a Greexit, or the country’s withdrawal from the euro zone, could have deeper ramifications. The solidarity of the 19-state economic block could be shaken if one of its members drops out, motivating weaker members like Portugal to follow suit.

It could be a better prescription for Greece to return to its old currency and seek cuts in interest rates and a devaluation instead of sticking to the harsh belt-tightening. But an exit from the euro zone could stoke consumer prices and disrupt the financial system. Most Greeks also prefer to stay in the euro zone. It is therefore likely that a last-minute compromise would be arranged to preclude the extreme option of a Grexit.

The lingering problem is that the Greek crisis cannot be solved simply through a financial bailout. The economy failed to get any better despite multibillion-dollar bailouts since 2010. Its productivity is at rock bottom. Per capita output does not even reach half that of the Germans. The fiscal state is in a mess due to welfare profligacy. Corruption and tax evasion are rampant. The country is relatively small with a population of 10.8 million. Income levels are relatively high, with Greeks earning an average of $28,000 in 2007, before the financial crisis of 2008, similar to what Koreans earn today. But the economy contracted 4 percent on average in terms of per capita real income over the last six years. National income has been shaved to $21,700. Unemployment hovers at 26 percent and at 50 percent for the young. Its future remains perilous with or without bailout.

Greece provides a lesson to us. It says that a country with a rich legacy and the historical significance of being the birthplace of Western civilization can fall from grace and be doomed if it spends recklessly and squanders resources without endeavors on labor and intelligence to improve productivity. A country can fall into disarray if it drags its feet on much-needed reforms in pensions, labor, finance, debt and competitiveness.

Greece’s problems are the same ones that have been slowing our economy. A Siren call is both alluring and dangerous. On his way back from the Trojan war, Odysseus made his crew stuff their ears with wax and tie him to a mast so that he would be able to resist the call of the Sirens. To completely stave off temptation can be hard. But a resolute leader and commitment from the people can assure us safe sailing when waters turn treacherous.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, July 3, Page 35

*The author is an economics professor at Korea University.

by Lee Jong-wha