It?s the second coming for the Greek economy

Vatican City 1536. Michelangelo starts work on ?The Last Judgment,? a fresco on the altar wall of the Sistine Chapel which is considered to be one of his masterpieces.

The painting depicts Christ in the center, with his mother Mary on his right, as he announces the final and eternal judgment of all humanity. St Peter on the right holds a silver and a gold key, the keys to heaven. The souls of humanity rise and descend to their fates as judged by Christ, while Charon chases the damned from his boat into hell, where Minos, the judge of the underworld, is waiting.

Greece, 2011. It?s as if Michelangelo?s masterpiece has come to life as we seem to be witnessing the second coming, for the Greek economy at least. At the heart of developments, Eurogroup chief Jean-Claude Juncker and German Chancellor Angela Merkel weigh the prospects of the Greek economy after the so-called Memorandum II. At the same time, the European Central Bank holds the keys to Greece?s economic heaven by refusing to OK a radical restructuring of the Greek debt.

Meanwhile, the souls of Greek taxpayers, frustrated because of the burgeoning tax burden and successive wage cuts, appear ready to return to the good-old but greatly undervalued drachma in order to pay for their journey to the modern-day Hades, that unknown territory that lies outside the eurozone.

Greeks are frustrated for good reason. Nevertheless, they seem to ignore the fact that previous devaluations of the drachma (15.5 percent in 1983 and 15 percent in 1985) failed to bolster the competitiveness of the economy simply because the labor market was – as it remains today – one of Europe?s least flexible. This also explains why inflation remains high in spite of the steep recession.

Amid the political turmoil and increasing social tensions, it?s worth proposing a set of economic measures that could guide the economy to the gates of heaven.

First, the opening of closed-shop professions prepares the ground for a competitive economy. Second, the Education Ministry?s plans for the management of the country?s universities (such as the proposal to select rectors after the position has been advertised publicly) will bring the education system closer to the demands of the modern labor market and thereby also help curb youth unemployment, which now hovers over 36 percent.

Third, the privatization-or-drastic-tax-cuts dilemma is false. The economy needs a policy mix which will combine all of the above. However, these measures can only help reduce the deficit and pull the nation out of recession provided that we also put an end to vacuous partisan confrontation. For even if we wish to privatize state companies or reduce tax rates, no levelheaded investor is willing to put his money in a country wracked by political and social chaos.

*Costas Milas is professor of financial economics at the University of Keele.