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1 July 2015

Don’t punish the Greeks for the current crisis – they shoulder the heaviest burden

It's hard to imagine many other countries putting up with a 25 per cent decline in GDP, a 26 per cent unemployment rate and 35 per cent salary cuts without a revolution and a public lynching of their elected officials.

By Vicky Pryce

The Greek drama continues to play itself out in twists and turns on a daily basis. And it has become a game of how much more Greece and its population can be squeezed before the country implodes, or explodes, as it must surely do whether or not it leaves the eurozone.

It could have been foreseen. The inability of the Greek political class to rule in a transparent, non-clientilist, non-corrupt manner has led to very little productive investment in Greece. The state became large and all-pervasive, stifling entrepreneurship through excessive bureaucracy and appalling administrative inefficiency.

Yet Greece could boast one of the fastest growth rates in Europe since the war. The introduction of the euro, bringing with it low interest rates and a release from any balance of payments and currency constraints, gave it a further massive boost until the crisis hit and the euro’s defences were found wanting. The country didn’t help itself by hiding the extent of the public deficit it had accumulated.

But one must admire the people they presided over. I find it hard to imagine many other countries putting up with a 25 per cent decline in GDP, an unemployment rate of 26 per cent and a 35 per cent cut in salaries without having a revolution and a public lynching of their elected officials.

They have endured a further squeeze in living standards as taxes have been put up repeatedly, including on houses, which tend to be the Greeks’ main asset. Pensions, an area of intense focus in the negotiations, have been cut extensively.

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As the FT has recently pointed out, Greece has endured the largest contraction under the IMF-inspired austerity measures of any advanced economy since 1950, and has been characterised by the longest period of consecutive annual declines in GDP.

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And yet, despite popular myths, the individual Greeks were hardly profligate. Households’ borrowing as a percentage of disposable incomes and companies’ debt as a percentage of GDP were among the lowest in the eurozone just before the crisis.

The banking system will be under pressure, as a continuation of the emergency liquidity assistance will now for the moment no longer be available. 

Already, the average Greek, a significant proportion of whom are at, or already below, the poverty level, is restricted to withdrawals of just €60 a day. I understand this may be reduced even further in the run-up to the snap referendum on Sunday 5 July.

The Greeks have been badly served by successive governments, and more recently by creditors who remain more concerned about their voters back home than the collective European good.

Whatever their country’s fate in the next few days, the Greeks will most likely be plunged into even more painful conditions. A vote to reject the creditors’ proposals will almost certainly mean a return of the drachma and to inflation – maybe even hyper-inflation – as the new currency devalues as expected.

But the alternative means accepting further austerity for years to come, unless the Europeans soften the conditions and begin considering debt restructuring and debt relief. Who would want to be a Greek right now?

Vicky Pryce is chief economic adviser at CEBR and author of Greekonomics