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Michael G. Jacobides Headshot

Why Financial Discipline Won't Save Europe and How Governance Change Might Do the Trick

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The EU has taken a hesitant but crucial step towards its own integration and the survival of the Euro. Through the provision of bank guarantees, the vicious circle between latent currency instability and deposit runs may have been broken. Bankia may be relieved that it will not be run into the ground by Spaniards' fear of a Euro-exit.

This solution might have been politically complicated, but it was not fundamentally difficult. And we all know that the deeper and more difficult issues remain. Press and politicians alike focus on fiscal integration and the need to revisit sovereignty and fiscal discipline. Some, mostly southerners, argue that an integrated Europe is worth the cost and adjustments. Others, mostly northerners, are concerned with the potential costs to themselves or the project's long-term viability and desirability. The European project risks becoming a zero-sum game edging towards disaster, and all seem to be forgetting an important point: The problems of the south are structural rather than fiscal.

If we consult the OECD's statistics on hours worked per worker, we see that the country with the highest national average after Korea is none other than Greece, which has been steadily closing in on the top spot. The Netherlands comes last, with Germany just ahead. How can this be? Don't Greeks sip ouzo on the beach while the virtuous Germans build cars? According to the statistics, that is entirely wrong. If we look closely, we see that the real problem for Greeks -- at least, those with jobs -- is not that they're work-shy. It's their monstrous public sector, which is inefficient, often corrupt, and prone to meddling with the allocation of productive effort in the private sector. In other words, Greece's problems are fundamentally structural. Its administration is bloated and hopelessly bureaucratic, unable to reform itself. The story of Greece is the story of a failure in governance.

These structural problems, which cause tax evasion (and are often seen to justify it), are not unique to Greece. Spain's massive banking mess with the Cajas de Ahorros is due to local politicians' influence on banks, and their iniquitous links to property developers. Italy, too, suffers from nepotism, political clientelism and corruption. It is precisely this endemic southern European disease (most acute in Greece) that the EU can fix.

The problem with structural reform is that it upsets established links, interests and routines. It goes against the grain of the political and administrative infrastructure. It is always part of political rhetoric, yet rarely translates into practice. So EU restructuring projects may offer the continent a unique opportunity to tackle this problem. In Greece, the troika (the EU, ECB and IMF) provide the ideal potential vehicle for something that the Greek public desires, but its politicians cannot (or will not) deliver.

What Europe now needs is a union that helps reform the governance of weaker countries. It's not about wealth transfer, but about a set of changes that help us all. This might fly in the north, too. It's time to use the EU as an objective yet proactive arbiter who will help restructure weaker countries through greater transparency and the redesign of their administrations.

The benefits are manifest, but change is alarmingly slow. Greece's story is a case in point. The last three years have seen little progress in structural reform, particularly in areas like administrative rationalization or tax evasion. Greece has been able to get away with disastrous "fiscally equivalent" measures where structural goals were not met, leaving the original problem intact. The EU task force is an overwhelmed and unwelcome band of mid-level European bureaucrats who speak Greek; what is needed is a focused group of senior change managers with a strong mandate. Neither resourcing nor expertise has been planned for administrative reforms. And while the troika now recognizes the problem, the new Greek government is poised to defend the crumbling public administration and its protégés.

So what can be done? EU Task Forces such as those operating in Greece should not just support ministers with expertise. They should be empowered to identify governance issues, corruption and administrative failings and suggest solutions. They should be able to require for Key Performance Indicators to be published and support their digestible presentation. They should facilitate Greek-led initiatives to bypass or report corruption and cronyism, and their recommendations should not be merely consultative. But doing so not only requires Greek politicians play along and accept that mandate, but also means the EU has to change its ways and its people. Change managers and governance experts must replace polite bureaucrats with conservative reflexes.

Europe has a future, and at the heart of it lies improving the governance of the south and borrowing from the achievements of the north. This will require a change of approach, so that we find those with the skill -- and the will -- to lead the change effort. Redesign and execution should be the target, and the World Bank's recent change of heart, now offering assistance to help rebuild Greece is welcome. Let's hope that northern European leaders will push in this direction. Southern Europe's citizens may eventually have something to be thankful for.