Joining the euro allowed Greek politicians to embark on vital though unpopular economic reforms that would have been politically impossible outside of a currency union – and the adjustment programmes now being imposed on the country as a result of its international bail-out will help create a more dynamic economy with greater personal freedom, according to a new opinion piece published by the Central Banking Journal.
Herbert Grubel, a professor of economics at the Simon Fraser University and a senior fellow of the Fraser Institute, says the difficulty of elected governments driving through harsh policies with the promise of a brighter future is the ‘Achilles heel' of modern democracies – but argues that joining a currency union offers politicians in a country such as Greece the opportunity to break the harmful economic cycles.
Governments, according to Grubel, can justify joining a union by touting the merits of doing so, such as exchange rate stability, lower interest rates and transactions costs, and more trade and capital inflows. The adoption of a common currency, he writes in the article, A turning point for Greece and the euro, can enable government to tackle tactical issues that are typically opposed by special interest groups without the need for explicit legislation that opposition politicians can attack in a manner that threatens electoral defeat.
The most fundamental benefit of adopting the euro was that the Bank of Greece could no longer be required to finance fiscal deficits by printing money and the European Central Bank was free from pressures by national politicians and would not buy Greek bonds due to those pressures.
Of course, currency union has not proven to be a cure-all for Greece's woes. The reasons it did not work, Grubel argues, is because Greece – like other EU members – ignored the provisions of the stability pact, and private credit rating agencies did not downgrade Greek debt as expected, meaning its borrowing costs did not increase.
The energies of a people are free of the yoke of a system that benefited politicians and some in the economy at great cost to the majority of Greeks and future generations
The economic adjustment Greece is currently undergoing as a condition of receiving international financial assistance is, Grubel says, inevitably imposing hardships on some people. In Greece, he says, it is primarily the recipients of benefits of the ‘vote-buying' practices of the past. "Many civil servants will lose their jobs," he says. "Those remaining will receive lower wages, fringe benefits and job security. The unionised workers in nationalised and protected industries will face the same fate and the deregulation of labour markets will reduce the power of the unions."
The reward for this difficult adjustment period, however, will be not just the end of the fiscal crisis but also the arrival of a more dynamic Greek economy, Grubel writes, "in which the energies of a people are free of the yoke of a system that benefited politicians and some in the economy at great cost to the majority of Greeks and future generations".