EMU and the Greek Crisis: Are There Lessons to Be Learnt?

Abstract

We describe the political-economic environment that precipitated the Greek crisis. Involved were nocuous collaborations between private interests and the formally appointed custodians of the public interest, and a captured politicized bureaucracy. The confluence of these forces aided in the pilfering of public funds, allowed rampant tax evasion, and sanctioned the deterioration in the quality of publicly provided goods. From a macroeconomic perspective, the failure of successive Greek governments to reverse the decline in the national saving rate, and not the government budget deficit per se, is the main reason for the crisis. The inability of EMU authorities to react to portents of Greek failure, such as ongoing large current account deficits that were not hidden by “Greek statistics,” expose a major fault line in EMU’s design and implementation through the Stability and Growth Pact.