Blame it all on the euro

Whenever I hear the argument that the euro has made things expensive in Greece, I feel that someone is again trying to trick the public and muddle the debate. France and Germany are also in the eurozone but a cup of coffee in Paris and Berlin is cheaper than in Athens. As the figures show, this also applies to many other products, whether they be basic or luxury items. So it is not just the monetary unit that is to blame for the high costs but other factors as well – economic, social and psychological. Ten years ago, in early May 1998, the European Union’s leaders decided to create the Economic and Monetary Union. Today, 320 million Europeans in 15 countries use the euro. «Economic and Monetary Union and the euro are a major success,» Joaquin Almunia, the commissioner for economic and monetary affairs, wrote in a foreword to a study on the euro’s first 10 years. «For its member countries, EMU has anchored macroeconomic stability and increased cross border trade, financial integration and investment. For the EU as a whole, the euro is a keystone of further economic integration and a potent symbol of our growing political unity. And for the world, the euro is a major new pillar in the international monetary system and a pole of stability for the global economy.» The euro’s successes are impressive, especially if we remember the dive that the new currency took against the dollar soon after its inception. Inflation, deficits and unemployment were reduced while trade and development grew. In Greece, the strong euro protected us from the worst effects of the recent doubling in oil and food prices on international markets. But perhaps the most important benefit of the euro for us has been that it made us feel that we were Europeans in practice, not just in words. We can travel anywhere in the eurozone and use the money that we use at home. All is not rosy, of course, as Financial Times analyst Martin Wolf noted in a recent piece. In eurozone countries, real per capita GDP growth was 1.6 percent each year from 1999 to 2008, whereas in the previous decade it was running at 1.9 percent per annum. In the three major economies that have not joined EMU – Britain, Denmark and Sweden – development was at 2.2 percent per year. After listing a number of other figures comparing the countries in and outside EMU and the United States, Wolf concluded that it is still too early to judge whether the institution has succeeded. Regarding Greece’s indicators, both Brussels and Greek officials have repeatedly said that the country has not made the necessary structural changes that would increase its competitiveness. This has allowed a wasteful and unproductive system to continue. The low interest rates that EMU entry ensured allowed many Greeks to borrow money to buy houses and new cars but also all kinds of products and services – necessary and unnecessary. Real wages in Greece rose by about 10 percent at a time when they fell by more than 10 percent in Germany. The result was consumer frenzy as Greeks spent borrowed money. This spending played a major role in spurring growth but it also increased imports, widening the current account deficit even further. Products kept getting more expensive because people kept buying them. Now, as things get tougher because of inflation and higher interest rates, those who were relatively well-off are reaching their limits, while those who have only Greece’s generally low salaries to live on are experiencing great difficulty. We say that we have European prices and Greek salaries. Unfortunately, at a time when an effort was being made to raise Greek salaries, prices went through the roof – beyond what we would pay in many richer European countries – eating up our gains. So if the euro is to blame for anything, it is for bringing lower interest rates (i.e. cheaper money) to Greece. This resulted in higher consumption and a standard of living that obscured the fact that the country was not producing enough. Growth was high, but so was inflation. The fact that our economy and bureaucracy are so unproductive and wasteful that they gobble up the money and efforts of the Greeks is forgotten in the confusion over how much the euro is to blame. This is a blessing for our politicians (with few exceptions), who do not want to introduce meaningful reforms nor clash with economic interests. And in the confusion, nothing can be fixed.