How can Greece dig itself out of crisis? From the sunny shores of south-eastern Europe, it could do worse than take a look at the windswept, north-western corner of the continent and study what the Irish government is doing.
As I noted last week, Greece, in spite of the disastrous condition of its public finances, has hardly suffered at all so far in terms of the living standards of ordinary citizens. Gross domestic product is thought to have slipped by a mere 1.1 per cent last year. By contrast, Ireland has experienced a vicious recession: between the fourth quarter of 2007 and the second quarter of 2009, Irish GDP slumped by more than 10 per cent.
Moreover, the Irish banking sector fell into such distress as a result of the global financial crisis that the government was forced to inject €11bn, or 7 per cent of GDP, into its banks last year. It has also been forced to establish a “bad bank” – the National Asset Management Agency – to detoxify the system. If it had not been for the unorthodox support measures provided by the European Central Bank, it is entirely likely that the Irish financial sector would have gone into meltdown.
But now the Irish government is doing its bit to overcome the crisis. Cuts in public sector wages and welfare benefits form part of what is the most stringent budget in Ireland since the declaration of independence in 1919. For sure, the yawning budget deficit will not be closed overnight, and Ireland will have to live with a public debt far higher than it had in its Celtic Tiger days. Economic recovery will be fragile.
But given the constraints of European monetary union (devaluation is not an option, there is no national control over interest rates, and so on), Ireland has bitten the bullet and pushed through the only measures that will work.
Brian Lenihan, Ireland’s finance minister, made an interesting point last year when he said other European Union governments were amazed at the mild public reaction to the austerity measures in the 2010 budget. There would have been riots in France, he observed.
What about Greece? The conventional wisdom is that a Mediterranean government can’t adopt Irish-style rigour because people will pour into the streets, social order will be threatened and the authorities will back down. This is too condescending, in my view. Street protests have a ritualistic quality in France, Italy and elsewhere in southern Europe, and there is no automatic reason why they should throw a government off course.
What the Greek government needs to demonstrate is willpower, patience, intelligence and, above all, honesty – for this is, in the final resort, a crisis of confidence not in the Greek economy, but in the trustworthiness of the Greek political classes.
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