Greece in 2010: A Tragedy Without(?) Catharsis

Abstract

The Greek crisis in 2010 was a ‘tragedy waiting to happen.’ However, and contrary to the impression created by the stabilization program’s immediate focus on restoring fiscal balance, its roots lie in the eroding over the past three decades international competitiveness and the attendant de-industrialization of the country. Catharsis, i.e., the creation of the conditions for sustainable long-run growth, requires a coherent, and bolstered by wide social consensus, medium-term strategy to improve competitiveness and redeploy labor and other production factors to the tradeable sector. Nevertheless, owing to the accumulated imbalances, catharsis is fraught with risks. Yet, the proposed - with a hint of immediate results - alternatives, such as, government debt rescheduling with possible discount and a temporary or permanent exit from EMU, are even worse: They are not likely to succeed, for they do not adequately address the dramatic erosion of competitiveness, and have severe potential repercussions.