What Greece points to, as far as the challenge of structural adjustment is concerned, is a fundamental problem that all of Europe must address soon. The trend that all centre-left or leftist inclined governments in the European Union (including the UK between 1997 and 2010) have entrenched since 1980 is to embed an inefficient and expensive bureaucratic monopoly for the intermediation of all services (making even services that can be provided privately, with greater efficiency, public instead) in the economy.
So-called ?investment? (actually grotesquely wasteful expenditure) in public service improvement has been extremely inefficient across Europe.
Evidence in the UK over the last 13 years suggests that a 10% increase in such ?investment? yields barely a 1% increase in public service output, efficiency and productivity. That is creating a situation where public costs are escalating uncontrollably because of the bureaucracy and inherent conflicts-of-interests involved in the state providing and regulating such services.
Citizens (or subjects) across the EU are becoming clients of overweening sovereign states goaded by an effectively unaccountable supra-national mechanism. That is also leading to a degree of state intrusiveness into privacy and citizen-control that is becoming Orwellian in nature. Governments across the EU are now using the threat and spectre of endless and unstoppable terrorism to pass laws that threaten even further erosion of basic freedoms and vulnerability to bureaucratic risk. The state has attempted to make clients and customers out of all its citizens and make them totally dependent on the state for insuring them against virtually every sort of risk. The monopoly-monopsony situation that arises when the public sector reserves the exclusive right of direct provision has resulted in public costs spiralling completely out of control.
Across the EU, the pendulum has swung much too far in the direction of social provision and protection. Sadly, EU electorates have become hooked on to it over the last two decades because such profligacy was financed almost entirely by external borrowing and not by internal taxation. That party has come to an end; and not just in Greece or the PIIGS (Portugal, Spain, Ireland, Italy and Greece). The rest of Europe needs to take heed of falling into the same trap?not least the UK. The legacy of the last 20 years needs to be unwound. The most profound element of structural adjustment that has to occur is a shift back to private provision and resumption of private responsibility for financing and insuring social protection and especially for funding pensions in the private and public sectors. That also means rebalancing European economies towards less consumption, more saving (on the part of households, corporates and, most importantly, governments) and more investment in capital formation to replace physical and social infrastructure that is deteriorating rapidly.
Growth in the EU over the next decade (which will be necessary to sustain a growing level of restructured debt service) will have to come from net exports and net domestic investment (i.e. gross capital formation) increasing by around 5-10% of GDP with consumption declining by the same amount. That will not be an easy adjustment?for an uncompetitive EU block (with the exception of Germany and one or two other efficient economies)?to make without substantial pain caused by a significant drop in real wages, inflation and effective trade-weighted devaluation of the euro versus other trade-partner currencies including in the US, Japan, China and the rest of East Asia (as well as countries like Brazil, Mexico and Chile).
But it is unlikely that the EU?s trading partners (especially the US and China) will permit such exchange rate adjustment to occur without resistance in the form of competitive devaluations that will impoverish all. The EU?s adjustment will be made even more difficult if the price of oil and gas rises dramatically, resulting in further implosive tendencies as far as growth is concerned.
Unfortunately, the electorate in almost all EU members is in no mood to adjust to such circumstances. The union dominated public sectors across the EU will pose the greatest threat and challenge. Across the EU, the size of the public sector needs to be reduced by between 15-30% across different countries. The EU needs to adopt a new golden rule that limits the size of the public sector (measured by its role in value addition) to only 40% of GDP (I would prefer 33%) without immediate equilibrating action being taken to contain it. When public sectors exceed 50% of GDP their economies run the risk of a parasitic function devouring the host that sustains it. Political leadership of extraordinary quality will be necessary to convince electorates of the situation they face. At present, such leadership is conspicuous by its absence; although the recent coalition formed in the UK has generated more hope than might have been thought possible a few days ago.
Greek tragedies have lessons for the rest of Europe that need to be learnt in time by all its members. The most important lesson of all is that the multiple adjustments that are needed in the five PIIGS?daunting though this is?need to be made NOW. These countries do not have the luxury of making haste slowly. Their efforts would be aided if the rest of the EU, which is not yet in the same dire circumstances (but soon will be, without a timely change of trajectory) were to travel along the same path. That would reduce the cognitive dissonance likely to arise from some EU members having to make massive adjustments to protect a common currency zone while others continue to indulge in the luxury of what they cannot afford.
(Concluded)
The author is an economics and corporate finance expert