Randy ShumwayIn Greece, three out of every four public sector employees opt for early retirement.

This fact alone has led to the Greek government paying an unconscionably high amount, totaling nearly 17.5 percent of the country’s GDP, to pension funds. Moreover, tax evasion is half-jokingly referred to as Greece’s national sport, where an estimated 10 billion euros go uncollected every year. In a country with just over eleven million people, this means that, on average, nearly a thousand dollars goes uncollected each year for every Greek resident. The compound effect of Greece not collecting the tax revenue it is due while simultaneously paying an enormous amount for pensions has contributed substantially to a severe debt crisis and has led to significant unemployment, particularly for the younger generation.

Prior to the financial crisis, the Greek economy was comparatively healthy and averaging growth rates of about 4 percent per year. However, the world financial crisis as well as Greece’s growing debt problem led to a country-wide recession that has not seen improvement since 2007 while simultaneously exposing the decaying undergirding of the Greek economy. By 2013, the Greek economy had shrunk by nearly 26 percent, and conditions have not improved since.

On the basis of these troubling circumstances, economically stronger member-countries of the European Union have demanded austerity measures to tamp down on Greece’s overly-generous welfare and pension programs and to reduce the Greek burden on other members. 

The painful reality, though, is that some of these austerity measures are more likely to perpetuate the country’s economic woes.  While cost-cutting and tax-collecting initiatives must eventually be strictly implemented in order to enable sustainable economic growth, the best ingredient for job growth is, as always, flourishing businesses.  Therefore, instead of unilateral austerity, incentives should be offered to stimulate small business growth and entrepreneurialism.  Tax breaks, in lieu of systematic tax hikes, should be offered to growing businesses that can increase exports and decrease unemployment. Policies and strategies should be enacted to create an environment for businesses of all sizes to grow and prosper, not to punitively choke economic activity. This will not only allow for the creation of more jobs in Greece, but will pump money back into the economy, lifting all Eurozone countries. This strategy is exactly what enabled the U.S. economy to recover relatively rapidly in the wake of the 2008 financial crisis.

Rewarding financial success will promote recovery far sooner than will budget cuts. But instead, the International Monetary Fund, European Central Bank, and European Commission recently bailed out Greece only on the condition that its government accept massive widespread budget cuts and tax hikes. A similar solution was previously attempted with Greece, and ultimately failed as the country was left incapable of recovering from its 2008 bailout thanks to accompanying measures that stifled, rather than stimulated economic activity.

Intuitively, forcing immediate austerity on economies that seem to make sport out of spending others’ money seems the appropriate thing to do.  But the more effective and pragmatic long-term solution will be to reward the types of positive behavior that will ensure growth across interconnected economies.  Leaders should therefore incentivize innovation and productivity while creating an environment that allows for current and future business growth. As the Greek economy gets back on its feet, the focus should shift to creating long-term structural repairs that will ensure later retirement ages and more consistent tax collection. For now, though, the Eurozone’s best hope for economic recovery is the carrot, not the stick.