Eurozone crisis, five years on: no happy ending in sight for Greek odyssey

Greece loves its epic tales and the greatest of them is the story of Odysseus, the hero who took 10 years to find his way back to Ithaca at the end of the Trojan War.

A modern version of the Odyssey began in Greece five years ago this weekend when the government in Athens admitted that it had cooked the books to make its budget deficit look much smaller than it actually was. Few thought then that the scandal would have serious ramifications or that the journey through the stormy seas of crisis would have taken so long.

Back in October 2009, the mood in the eurozone was one of cautious optimism. The year had started with Europe caught up in the global economic crash that followed the collapse of Lehman Brothers, but co-ordinated action by the G20 during the winter of 2008-09 had created the conditions for a recovery in growth that appeared to be gaining strength as the year wore on.

The admission by George Papandreou’s new socialist government of a black hole in Greece’s public finances was unwelcome but not viewed as something to be unduly worried about. But the policy makers in Brussels and Frankfurt were wrong. Greece did matter.

What has become clear subsequently is that the eurozone crisis is similar to Scylla, the monster that devoured many of Odysseus’s men: a many-headed beast.

The first sign of the crisis to come was the deterioration in government finances, not just in Greece but in other eurozone countries. In truth, though, rising deficits were symptoms of three bigger problems.

The first was that many countries in the eurozone had a competitiveness problem. Monetary union had given all the members of the single currency a common interest rate and no freedom to adjust their exchange rates. This meant that if a country had a higher inflation rate than its neighbour, its goods for export would gradually become more expensive. This is what had happened regularly to Italy during the post-war period, when its inflation rate was invariably higher than that in Germany. This time, however, Italy could not devalue.

A second problem was that the European banks were loaded with excessive amounts of debt. Low interest rates led to strong growth for countries on the periphery of the eurozone, normally driven by their real estate sectors. Money from banks in the countries at the core of the eurozone – France and Germany – flooded into Spain and Ireland, where house prices were booming. They were also loaded with US sub-prime mortgage debt. When the crash came, the banks were in serious trouble. Many of them remain in a critical condition.

A third problem is that Europe lacked a growth model in the years leading up to the crisis – and still lacks one. For Germany, the answer is for every country to bear down on its costs and make itself more competitive. But one country’s improved competitiveness is another country’s reduced competitiveness. Five years on, the eurozone is locked into a low-growth, low-inflation, high-unemployment paradigm.

As with Odysseus, the story of the past five years is one of blunders made, unforeseen problems encountered, opportunities missed. The Greek of myth eventually found his way back to his wife, Penelope. A happy ending for the eurozone still looks some way off.