Greece and the euro: Is the worst now over?

With the European Union’s warning letter on Wednesday, chastising Greece for dodgy budget data and initiating an «infringement procedure» unlikely to land the country in court, it appears that the worst of Greece’s self-generated eurozone embarrassment has passed. Yet the receding tide has washed some reputations away with it, and it is far from certain whether Greece, or the EU, will emerge better off as a result of this airing of the country’s dirty linen – and by extension, the EU’s – in so public a fashion. The search for truth often has wider consequences, intended or unintended, while politics is full of mixed motives; and this issue has been thoroughly awkward all around. The Greek government reopened a can of worms by questioning the budget figures supplied by the previous, PASOK government under Costas Simitis, bringing down the EU’s (and the opposition party’s) wrath. For the EU, it revealed inadequate data gathering and budget scrutiny, and threatened another nail in the coffin of its Growth and Stability Pact, with its (famously skirted) 3 percent limit on allowed budget deficits that will be scrutinized anew in March. This has been no mere exercise in alternative bean-counting; it awkwardly but effectively internationalized a domestic political issue, while exposing some shaky architecture underpinning the euro itself. Yet by isolating the Greek case and calling it «a completely different situation,» the Commission may be undercutting any wider reforms it says are needed. Scrutiny by Eurostat, the EU’s statistics agency, has shown that in no single year from 1998-2004 was Greece’s deficit below 3 percent, while for 1999, its claimed deficit of just 1.8 percent levered the country into the eurozone – erroneously, it seems, as the EU says the actual figure was closer to 3.4 percent. Military expenditures, generally a bugbear since states regard them as confidential, were responsible for most (up to 90 percent) of the subsequent budget revisions by the new Greek government; social security and optimistic tax revenues were other problems. One clear, and hardly inadvertent, casualty is the reputation of the PASOK governments of 1996-2004 for being good and budget-conscious Europeans, which has eroded like a castle in the sand. This public «audit» has also been a source of chagrin for the Bank of Greece and its governor, Nicholas Garganas, and even for the European Central Bank, where Lucas Papademos rose to vice president in the reflected glow of Greece’s putative success. Simitis himself is another notable casualty. While he lashed back at ND for besmirching his governments’ accomplishments, he must be ruing the waning of any European ambitions, especially contrasted with new Commission President Jose Barroso of Portugal – another southern prime minister whose country may have fudged its figures to join the euro, but who turned challenge into triumph in Brussels. Fate is not always kind in the world of politics. The EU has gone relatively easy on Greece – warning rather than penalizing it – because of the Karamanlis government’s proclaimed efforts to come clean; because Greece was not the only rule-bender; and because the EU itself is far from blame-free. Even so, it is not clear that Greece has emerged better off, as the eurozone’s former prodigal son has transformed into its Johnny-come-lately. Finance Minister Giorgos Alogoskoufis has rightly won plaudits but Greece will be even more closely watched by EU number-crunchers than before. And last week, Greece’s credit was downgraded by rating agency Standard and Poor’s, which will raise the cost of servicing Greek debt. The Greek case may be cited as an example to avoid for the 10 new EU members, and could have a chilling effect on euro area expansion. Slovak Finance Minister Ivan Miklos even called the situation «dangerous» and said it could toughen his country’s task. Overall national debt, as well as deficits, may get closer EU scrutiny, though this would be no bad thing. Yet substantive reforms, like giving teeth to Eurostat, are hardly guaranteed, given how Greece is being treated as a one-off. Outside Greece, this internal eurozone issue has resembled a tempest in a teacup which has hardly dented the euro’s current wave of outer confidence – being bid to record levels on world markets and subject to speculation about central banks boosting their euro holdings at the expense of the long-dominant US dollar. The euro’s strength has mostly been a mirror image of the greenback’s own deficit-related fall, with the two currencies emerging as a sort of proxy for transatlantic tensions. These are heady days for the euro, but the Greek case reminds us how young the experiment still is, balanced uncertainly between strict formulas and a need for flexibility and reliant on a web of national cooperation. Europe’s single currency remains far from its sole currency, as it is now legal tender in fewer than half of the 25 EU members. Things are neither as dire nor as rosy for euro guardians as they might seem.