...a blog by Richard Flowers

Wednesday, July 01, 2015

Day 5295: Making a Drachma out of a Crisis


Featured on Liberal Democrat Voice

The badly-wounded Greek economy lurches between survival and final total collapse.

When the Greek Syriza Government – elected on an unfulfillable promise to end austerity AND settle with their creditors – hit the brick wall of reality, they abdicated responsibility, punted it back to the people in a referendum where not even Nobel Prize-winning Economists understand the choice, and seemingly killed any chance of a last-minute rescue.

But now, as he's already over the brink, Prime Minister Tsipras appears to accept the demands of the people trying to save him.

Update: or would he rather his people voted no, and carried on into the abyss?

How can this rescue the Greek economy?

How much does a Greek... oh, you've heard it

This is what a taste of Economic Armageddon looks like: their banks are closed; their Euro lifeline is suspended; they've missed a payment to the IMF – though the IMF, obviously unwilling to pull the trigger, declares that they're "in arrears", rather than "default"; and they've managed to piss off most of their neighbours by apparently playing silly-beggars over this referendum…

There appear to be two – equally heartfelt – responses to the crisis unfolding in Athens and engulfing the Greeks.

The first is: Why should we (or at least Europe) continue to throw good money (raised from EU taxpayers) after bad when Greece has already been treated with incredible generosity – more than half of their debt was written off and the rest was effectively nationalised by the EU in the immediate aftermath of the global meltdown – while they have failed to do their part in reforming their pensions, government or tax collection?

The Greeks are seen – largely legitimately – as the authors of their own downfall:

  • their now notoriously-generous pensions (retire at 55, receive £1000 a month for 14 out of 12 months a year… it seemed too good to be true, and guess what… it WAS!); a welfare system that appear to involve generously paying grannies to make sure their kids are all right: Greece has a population of 11 million, 2.6 million (24%) of whom are receiving their pension. No wonder the system is still going bust!
  • their kleptocratic government (who fibbed their way into the Euro, and, with the help of Goldman Sachs, were hiding some rather substantial "off-balance-sheet" debts until they were uncovered as the whole sub-prime derivatives market unravelled in disarray);
  • their cripplingly-expensive loss-making 2004 Olympic vanity project that left Athens bedecked with new ruins of abandoned stadia;
  • and their basic unwillingness to pay taxes (with tax evasion estimated to run at 40%-50%!); their spending has gone up with their post-Euro-entry GDP, but they are still collecting roughly the same amount of tax as they were in 2001.

It's not that Greeks do not work harder than Germans – if anything, the reverse is true. It's not even that they all retire at 55 to sit on an Aegean beach. It's because Greece is a small country largely dependent on a service sector economy.

80% of the Greek economy is in service sector jobs. To be fair, so is Britain's! But unlike Britain, where high-value financial services are by far the biggest part of that sector (40% of service sector; 30% of the total economy – don't look smug; that's why our economy was nuked in 2008), in Greece those services are TOURISM and SHIPPING, both of which pretty obviously take a hit during a global recession (when fewer people can afford to take a holiday and fewer goods are being bought and sold and therefore moved about) and both of which are given a relatively low value (while huge banking hubs like London are RARE, there are PLENTY of OTHER places to go on holiday or OTHER boats to ship your goods in).

The pre-existing infrastructure for manufacturing in Germany (or for finance in London) put Greece at an inescapable disadvantage. Nor do they have the massive population of a China or an India or a Brazil and even if they did certainly not one willing to accept the low standard of living that lets those countries (currently) undercut on cost of labour. Hiking their minimum wage probably didn't help, but really they were never going to go low enough to be cheaper than places where people live on a dollar a day.

They wanted all the benefits (and some) of a Northern European economy. Without the Northern European economy to support it. So they elected Governments who gave them what they wanted but paid for it on tick.

And by electing Syriza, who were committed to spending even more money that they don't have (and have already made a start by re-hiring 15,000 civil servants), the Greek people have given a pretty obvious gesture to their creditors.

The other response is to see this as tyranny, even cruelty, an immoral "moral crusade" by faceless, foreign, unaccountable, "neoliberal" (see my button eyes roll), capitalist bankers overruling the sovereign wishes of a democracy. If it's NOT the Greeks fault – they are hardworking but geographically unlucky – then it must be someone else's, it must be the sinister cabal of capitalism!

This view says that the conditions imposed on Greece – in particular the demand that the Government slash spending to the point where they were able to run a surplus – were (indeed still are) not only utterly unachievable, but actually at the root of why Greece's recession has persisted for six years. Making poor people poorer doesn't magically make them richer.

Great Britain, they remind us – no matter how smug Gideon is about our superior growth rates – has moved out of recession while continuing to run elephant-sized deficits and thus stimulating not smothering our recovery (though that's largely thanks to Liberal Democrat amelioration of the more insane Tory austerity plans).

But Greece HASN'T been running a surplus either – they've just not run ASTRONOMICAL deficits the way Great Britain or Americaland have; with Greek debts already 175% of their GDP they've had no flexibility to do so.

There are a FINITE amount of lenders to go around, If EVERYONE is running deficits because of the recession, OUR deficit – looking like a safer bet – has probably sucked up international lending making it harder for Greece to attract another sugar daddy. In fact, their membership of the Euro may have actually SAVED them by forcing this role upon the otherwise-unwilling Germans.

Eurosceptics (and idiots) insist that membership of the Euro effectively locks Greece into an unsustainably high exchange rate that continues to draw money away from the Mediterranean countries and into Germany, and they should crash out and devalue to regain competitiveness.

These are usually the same people who celebrate Mr Frown's intransigence in keeping Great Britain out of the Euro, saying "look, look how badly Greece and Spain and Italy are doing!" even though – by their exact same argument – the huge financial centre of London would have sucked money into the UK making us huge winners from the deal.

There IS some truth in saying that single currency areas need to make revenue transfers back to their economic peripheries – in the UK (sterling single currency area) payments go from London and the South East to other parts of the country; in Americaland (US dollar single currency area) payments go from the coasts to the central States.

European debt-forgiveness has achieved something like this but in a half-hearted and haphazard manner.

However*, the REAL impact of Euro entry saw Greek GDP per capita go from $12,000 in 2001 (when they joined the single currency) to $32,000 in 2008 (when the market hit peak just before the crash) and has so far fallen back to $27,000. So anyone who says that the Euro has been a bad thing for the Greeks is totally talking out of their hat; and anyone who thinks that things there are as bad as they could get has wilfully blinded themselves to just how much further the Greek economy could fall.

The great fear of Germany (and everywhere else), apart from being stiffed with the bill for all this, is "moral hazard" or the "how many people can you pull into your lifeboat before it sinks and you ALL drown?" problem.

Greece may (still) end up defaulting. And if they DO, they may "get away with it", that is, see their way through to an economic recovery.

Iceland did something similar a few years ago. Their banks went bust and their government simply refused to pay up and when they refused to pay their debts it meant that somewhere else a lot of people's money ceased to exist. Iceland "got away with it", and have seen an economic recovery. That recovery was largely paid for by YOU, the British Taxpayer, because a lot of that money that ceased to exist was ours. Lured by ridiculously generous interest rates that, as it turned out, like the Greek pensions, really were too good to be true, lots of people had put their saving into Icelandic banks. And several councils had put really silly amounts of money there too. And the Treasury forked out to cover those losses, paid for from your taxes.

Those losses were a lot easier for sixty million Britons to bear than three-hundred thousand Icelanders.

If Greece defaults, European governments – mainly the German one – will fork out and eighty million Germans will find it easier to bear than eleven million Greeks.

But where does it end?

Because if Greece can "get away with it" – goes the worry – what's to stop Ireland or Portugal or even Spain or Italy defaulting? At SOME POINT we will HAVE to draw a line. So draw it here and now, they say.

So how do we get these two views? And how do we resolve them?

Well, I think (and it may seem perverse) that the first view is the OPTIMISTIC people, who think that Greece's problems COULD be solved (if they'd just do something about some of them!).

The second view is from people who think Greece's problems are UNSOLVABLE, and therefore want to bung the problem to someone else (someone with enough money to cope with it – meaning Germany… but… moral hazard…).

In a way this is because there are really TWO problems: lack of LIQUIDITY (i.e. no cash in the banks) v lack of SOLVENCY (i.e. expenditure exceeds – all possible – income).

What we NEED to do is SEPARATE the unsolvable problem (the ever-expanding debt that is soaking up all the money) from the (possibly) solvable one (the imbalance in the Greek economy).

So step one: quarantine the existing debts at zero interest. Postpone any further repayments by Greece.

Step two: rather than the random method of letting them borrow willy-nilly and then cancelling some arbitrary chunks of the debt, agree revenue streams from the EU that will allow Greece to BALANCE THEIR BOOKS in return for them implementing reasonable controlling of their spending (and tax raising).

Step three: be aware that every other country in Europe is going to want in on this scheme and immediately begin the work to create accountable democratic control, otherwise Germany will secede from the EU even before Britain manages to vote in Mr Balloon's daft referendum.

*Bite me, Michael Gove (the goft that keeps on goving)

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