Huffington Post — With Syriza lagging in the polls, Prime Minister Alexis Tsipras recently pushed through a pension boost and VAT suspension which, in Europe’s view, violated the 2015 bailout, worth $92 billion, by European institutions and the International Monetary Fund. Athens contended that it had met its fiscal targets while its creditors said they had to be consulted to assess the impact. They then suspended the package.
Insults started flying. The spokesman for the head of the Eurogroup of finance ministers said the moves “appear to be not in line” with the agreement. The spokesman for Wolfgang Schaeuble, Germany’s Finance Minister and chief beta noire of the Greek public, explained “In order to make the program successful, it is necessary that measures are not decided unilaterally or reversed without notice.” A member of Germany’s Bundestag complained of Greece’s “orgy of empty promises.”
The International Monetary Fund clashed with the Euro-creditors, warning that the overall program was not “credible.” The IMF indicated that additional tax hikes and pension cuts were necessary to meet program metrics and for Greece to qualify for debt relief. While the European Commission predicted that “investment is expected to take off in 2017,” the Fund concluded that “growth prospects remain weak and subject to high downside risks.”
Tsipras mocked “fool technocrats … who can’t even get their numbers right.” Looking toward a possible early election, he added: “we are not going to ask anyone about giving surplus money to those most in need.” His finance minister charged the IMF with “economizing with the truth.”
The Fund threatened to pull out of the program. Germany, the biggest bailout contributor, insists on IMF participation before any further disbursements. Moody’s warned that the spat demonstrated a “hardening in creditors’ positions toward Greece, which we expect will prolong negotiations over the second review of the program.”
Yet coming elections in France, Germany, the Netherlands, and possibly Italy could stiffen European resistance further. Kathrin Muehlbronner of Moody’s noted that Europe’s “political dynamics” and “electoral calendar” were “likely to complicate the negotiations and prevent a rapid resolution.” After all, nowhere in the EU is backing more aid for Greece a vote-winner.
However, pressure on Athens for more cuts, especially in social benefits, could trigger elections in Greece as early as the spring. Tsipras has proved to be an adept politician, but he now lags in the polls. He can ill afford to retreat from the recent benefit boost or impose new austerity measures.
Observers again began to wonder if Greece could, and even should, remain a member of the Eurozone.
In recent years Athens looked to America for support. President Trump said “I would definitely stay back. Germany is very powerful and strong. I’d let Germany handle it.” And if that didn’t work, Russia could “save the day if Germany doesn’t.”
Most Greeks have had more than they want of Germany attempting to “handle it,” which meant ever more austerity. Moscow looks like an equally unlikely savior. While the Greek government officially says that it expects no change in U.S. policy, the opposition figures American pressure for debt restructuring will disappear.
By joining the Eurozone Greece got to borrow money at interest rates comparable to those paid by Germany while spending money like Greece.
Athens lied when it claimed to meet the Eurozone’s official economic criteria. But the rest of the Europeans knew Greece was lying when they approved its membership.
By 2009 the good times ended. Greek leaders admitted that their economic statistics had little to do with reality. The lenders wanted to be paid and Greece was almost out of money. At particular risk were German, French, and Italian banks, which had lent the most, and German, French, and Italian politicians, who had put their people’s fiscal security at risk.
Which led in 2010 to the start of three bail-outs cumulatively worth almost $370 billion. Greece was the nominal recipient of the cash, from the infamous “Troika,” the European Commission, European Central Bank, and International Monetary Fund. To them more recently was added the European Stability Mechanism.
To solve a problem of bad loans which could not be repaid, the Troika loaded Greece up with more loans to pay. As Syriza’s original Finance Minister, Yanis Varoufakis, explained: “The Greek state became insolvent a year or so after the eruption of the 2008 global financial crisis. Against all logic, the European establishment, including successive Greek governments, and the IMF extended the largest loan in history to Greece on conditions that guaranteed a reduction in national income unseen since the Great Depression. To mask the absurdity of that decision, new loans—conditioned on more income-sapping austerity—were added.”
That’s a pretty accurate description of the Grecian mess.
How will Greece ever pay back all this money? Since the onset of the crisis both manufacturing and the GDP have dropped by about 30 percent; economists hope the economy will stabilize this year. Unemployment is at about one-quarter, with youth joblessness double that rate. Most of the unemployed have been without work for a year or more. The overall poverty rate is an astonishing one-third.
Germany, France, and Italy wanted to save their banks. European Union leaders desired to move continental consolidation ever forward. Along the way the EU and European Central Bank ignored their own rules to shovel money Athens’ way. The price paid by Athens was austerity and reform, which the Greek people greatly resented. Why should they have to pay for the party that the Europeans were well aware was likely to occur when the Eurozone inducted Athens?
Perhaps even worse, however, there has been far less reform than austerity in Greece. Economic officials talk about creating a “business-friendly environment,” but that’s not evident in practice. According to the World Bank, Greece was number 61 in the world in “ease of doing business” in 2015. It rose one place in 2016, then fell back to 61 in the 2017 rating, where it is below Kosovo, Albania, Rwanda, Serbia, Moldova, Kazakhstan, Croatia, and Russia. In Europe only Malta and Bosnia are further behind.
The Economic Freedom of the World found that Greece was number 36 in the world in 1980. It was down to 48 in 2000. It was a poor 82 in 2010. Alas, it has kept on falling, to 84 in 2013 and 86 a year later, the last year for which figures are available. Greece comes in at 92 on business regulations, 129 on overall regulation, 142 on size of government, and 143 on labor market regulations. In fact, Nikos Filippidis of the Athens Chamber of Commerce and Industry recently wrote that economic sentiment and consumer confidence have dropped “to the lowest level recorded since September 2013.”
Greece needs to free its people to be entrepreneurial. It isn’t hard to construct a detailed reform agenda. Constantine Michalos, president of the ACCI, called for smoother operation of the banking system, end of “hostile tax-policy treatment of entrepreneurship,” and expedited reforms “to improve the country’s investment environment,” including better public administration, judicial processes, and competition in markets.
However, such proposals generate fierce resistance from a panoply of vested interests which profit from the existing system. Many Greeks prefer the certainty of government dependency, irrespective of the cost. Politicians on both the right and left also profit from the system. Explained Kerin Hope of the Financial Times: “Each government’s practice has been to delay or dilute already-agreed measures in the hope of fending off the political costs of austerity. Greece’s political leaders are particularly reluctant to adopt structural reforms that would effectively end a system of clientelism, in which the party holding power hands out public sector jobs and contracts to its own supporters.”
Austerity might seem to visit an element of justice on the spendthrift borrowers. However, creditors who cheerfully and wildly lent with “eyes wide shut” in expectation of being bailed out if anything went awry deserve no more sympathy. And without growth-inducing reforms the bailouts offer no long-term solution.
Which suggests that the system is heading toward slow-motion catastrophe. IMF economists Maurice Obstfeld and Poul Thomsen recently concluded: “We do not believe that Greece can come close to sustaining even a modest primary surplus [before debt payments] and realize its ambitious long-term growth target without a radical restructuring of the public sector.” Yet the current bailout plan envisions a 3.5 percent primary surplus by 2018.
Proposals to simply hack away at wages and benefits may have reached Greece’s political limit. Dimitrios Papadimoulis, a member of Syriza and vice president of the European Parliament, is not alone in his opposition to “cutting pensions, wages and further minimizing public spending on social benefits.” Filippidis explained: “Greece’s middle class is collapsing under the weight of over-taxation, plummeting savings, and further impoverishment. In today’s Greece, four workers are paying taxes and contributions in order to pay the pensions of three pensioners and cover the needs to provide public health services, education, justice, defense, etc. Obviously this model is not sustainable.”
Pensions alone accounted for about 17 percent of GDP in 2015, compared to an EU average of nearly 12 percent. Further privatization would help, but the value of state assets has dropped by about 60 percent since the crash and, more important, parastatals are seen a politically-popular source of jobs.
Moreover, Greek goods and services cost too much for the economy to flourish. Jim Brunsden of the Financial Times reported that Greece’s “lack of price competitiveness is cited by EU officials as one of the main factors holding the Greek economy back.” On the Global Economic Forum’s international competitiveness ranking Greece actually fell from 81 in 2015-2026 to 86 in 2016-2017. Even Papadimoulis admitted that “the Greek economy needs to be more competitive, more of the same won’t do it.”
Which leaves currency devaluation the best solution, but that is prevented by membership in the Eurozone. Which means Athens should consider doing what always seemed to make the most economic sense: abandon the Euro and repudiate the debt. The process would be messy. Wailing and gnashing of teeth would fill the halls of European banks and other financial institutions. European politicians likely would lose their jobs in upcoming elections. But Greeks could get a fresh start and organize their lives as inefficiently and dissolutely as they desired, while creditors would have fair warning about the risks of lending in the future.
The Greek people aren’t sure what to do. A recent poll found that 84 percent of them believe the EU is moving in the wrong direction. They split 44-45 percent over whether membership is positive for Greece, yet a majority wished to remain part of the organization. The latter might change if the creditors demand more cutbacks in benefits and increases in taxes, however.
Whatever Greece’s present challenges, it is hard not to stand in awe when beholding the Acropolis, which dominates the cityscape. The “Golden Age” of Athens is long past, but the country’s history still resonates. For Greece to turn control of its economy over to foreigners capable of bringing relief would be understandable if still painful. To yield authority to those who have only delivered more hardship seems intolerable. At what point, one wonders, might economic pain cause the Greek people to reassert control over Greece’s future?
