Cause and Effect in European Politics and Law

EU should retreat from harmonisation, an analysis says

euinside, February 15, 2010

There are a lot of opinions why Greece managed not only to put itself into its current terrible situation but also to start dragging the whole eurozone backwards. One of the main reasons why only Greece is in such a difficult condition and the other countries are still holding up, is the almost full harmonisation of European legislation of those countries in various areas like energy efficiency and energy supplies, entrepreneurship, accreditation and certification, consumer protection, financial and pay services, regional policy and many other. The moist important impact of all those common rules is the lowest extent to which countries can compete each other because of their own choices in the overall spectrum of economic policy. This is what Veliko Dimitrov from the Institute for Market Economy (IME) writes in an analysis

He said that the lower the extent of harmonisation, the bigger the freedom of choice. This means that some EU member states will always develop relatively more stable and fast while others fall into crises (the Greek case) and will become poorer. "Fortunately member states are still not deprived of all leverages to define their own national economic policies, especially with regard to fiscal policy. This state of affairs should be kept unchanged so as to prevent the economic decline of the EU, caused by lack of healthy competition among nations. And why not think about a move backwards on various areas which are now harmonised?", Veliko Dimitrov asks in his analysis.

But what happened actually?

The expectations are the budget deficit of Greece to surpass more than 4 times the maximum allowed according to the Maastricht criteria (3% of GDP), and the economy in 2010 to contract for a second year in a row. Together with this, the constant strikes in the private and public sectors additionally increase the expectations for a negative growth because they were not envisaged in this year's programme. We could add here also the revelations of manipulation of national financial statistics and the growing distrust in the stability of the country.

The insurance against Greece's incapability to pay off its debt (CDS - credit default swap) increased in the last few weeks and reached over 350 basic points. This indicator for other members of the eurozone, also considered risky - Spain, Italy and Portugal is, accordingly - 140, 130 and 180 points.

A very interesting observation is made in the analysis - that, in fact, the current situation in Greece is not the result of some wild policy in the last few years but just the opposite - it is due to the traditional policy, which continued for years. This policy, according to regular observers, consists of uncontrolled spending of public finances, corruption in the public sector, high taxes and, naturally, tax evasion. In other words - if Greece had performed the reforms she was long ago advised to, the current situation could have been avoided, or at least, it wouldn't have been that serious.

And as the official currency in Greece is the euro, it was impossible the above situation not to influence the exchange rate - the single currency depreciated against the dollar by 10% for the last 3 months. Although the exporters are generally happy of depreciation, for all other players in an economy, this actually means getting poorer. And as Greece is not the only country in the euro area, this directly reflected on the economies of all other member states.