A problematic Greek deal
Contrary to popular narrative, Greece’s present mess occurred because it followed European doctors’ orders too closely. The recent deal might only make it worse
In a recent commentary, economist Anatole Kaletsky argued that the July Greece-Europe Deal could indeed succeed. “Rather than marking the beginning of a new phase of the euro crisis, the agreement may be remembered as the culmination of a long series of political compromises that, by correcting some of the euro’s worst design flaws, created the conditions for a European economic recovery,” he wrote.
As a long time supporter of the European Project, I wish I could share his optimism. Sadly, my analysis leads me to the opposite conclusion: The accord in its present form cannot work. At most it grants Greece and Europe a few months to come up with something better.
What is the reasoning behind this somber judgment?
First the facts.
In 2007 before the world crisis, Greece was not, repeat not, a basket case. It had enjoyed 14 consecutive years of sustained economic growth. True, there were serious structural problems but none of them were life threatening. The debt-to-GDP ratio was 105 percent — high but still acceptable. Today the European average is about 87 percent. Greek unemployment was 7.29 percent. Interestingly it even received a good report card from the IMF.
In 2015 Greece is a basket case. GDP is 25 percent lower than in 2007. The Debt-GDP ratio is a whopping 177 percent. The unemployment rate is 26 percent with youth unemployment over 50. There is a debilitating depression-induced brain drain which robs the country of its best minds.
Second: The Flawed Therapy. There were two bailouts offered to Greece between 2009 and 2014. Most of the money went to Greece’s lenders rather than to Greece itself. These bailouts were accompanied by mandatory structural reforms mainly in the form of austerity measures.
The conventional wisdom claims that Greece is in a mess today, because it did not follow doctors’ orders and did not introduce the necessary structural reforms.
The opposite view, supported by increasing evidence, suggests, on the contrary, that the present mess occurred because Greece followed the doctors’ prescription too closely.
What is some of this evidence:
(1) Pension reforms and wage cuts. Greek pensions were cut, even retroactively, which was clearly illegal since the pensioners had contributed for 30 years to their pensions. Wages were also cut. The result: much lower private spending which is a key component of the GDP and therefore a deeper recession.
(2) Lazy Greeks should work much harder like the Germans was the popular view. According to the OECD in 2014, the average Greek labourer worked 2042 hours per year, the Finns 1645, the Swedes 1609, the Danes 1436 and the workaholic Germans 1371! So much for laziness!
(3) Reduction of the bloated Greek public service. Greece reduced the number of its civil servants from 952,625 in 2009 to 675,530 in 2014 an enormous cut of almost a third. Greece has now fewer public servants per capita than France a key member of the Eurogroup ‘doctors.’ What was the result ? The laid-off workers just joined the army of the unemployed. Surprising? Not at all. Why should the private sector hire new workers under depression conditions?
(4) Combating ‘small’ tax evasion. Whenever possible, deductions at source have been put into effect, which means that the wage earners and small entrepreneurs now pay most of the taxes. The State is grabbing taxes from the lowest hanging fruit: the visible income of the common people. Result: further reduction in aggregate demand and less spending.
(5) Combating ‘big’ tax evasion. This has not been successful for the same reasons it is not successful elsewhere. In an open system with high global capital mobility, any attempt to tax rich people or corporations just makes them move their tax residency elsewhere. This is not just a Greek problem. It is a global one. To tax the Greek ship-owners is easier said than done. If they are displeased they can just leave Greece.
The verdict: Greece’s economic trajectory in the last six years has been a disaster. Now, if it is true that the country did faithfully follow doctors’ orders then the inescapable conclusion is that the doctors should metaphorically be sued for medical malpractice. A bad cold with fever (Greece in 2007) has been transformed into a life-threatening pneumonia (Greece in 2015).
Third: The July 13 Agreement just exacerbates the flawed therapy. The accord imposes more taxes including on Greece’s major cash cow tourism in the islands and reduces purchasing power through lower wages and pensions. The new proposed bailout would continue to target the reimbursement of foreign creditors. Some money could be allocated to growth but exactly how much and in what form is yet to be discussed. In other words more of the same and with a vengeance.
In addition two dangerous new elements: The Troika will (1) have to pre-approve some bills before they can be even be considered by the Greek Parliament and (2) take over and implement the privatization of Greek public assets to pay foreign creditors. If these two humiliating clauses are meant to be applicable only to Greece, it would lend credence to the accusation that the country is being treated as a colony by Europe. If they are to be applicable to other debt-ridden countries it would set a precedent which, I cannot believe, would be acceptable by any other country.
Can we imagine Brussels imposing a veto on proposed French laws before they are considered by the French National Assembly, or deciding if and when the Eiffel Tower should be sold off to pay foreign creditors?
It would be a new form of the Theatre of the Absurd.
Overall, the most persuasive argument over the unsustainability of the July 2015 Agreement is that it has been intellectually repudiated by both the German Finance Minister Wolfgang Schauble and the Greek Prime Minister Alexis Tsipras, the two chief antagonists.
As a result, the surprise free scenario is that by the end of 2016 or sooner, we will probably be facing a Greek Debt-to-GDP ratio of 200 percent and a forced disorderly Grexit which would inject a strong negative momentum to European Integration.
Fourth: What Next? As a long time supporter of the European Project, I believe a better solution can and should be found. As I have argued in a World Post article on March 17, the real choice for Greece and Europe is either win-win for both, or lose-lose, but not win-lose.
The July 13 accord has to be amended and improved and the present calm, with Greek banks reopening, should be treated as a welcome remission allowing all parties to go back to the drawing board. The contours of a win-win must be developed and I will modestly propose some inputs to that effect on another occasion, as others should do too.
But in closing, here is an interesting counterfactual scenario.
If, in 2009, Greece had been allowed to press the pause button on its debt and invited to concentrate on better growth — instead of being condemned to suffer punishing austerity, what would have happened? Quite probably the Debt-to-GDP ratio would have been significantly lower than it is today, due to the increase in the GDP itself, unemployment would be down as would the brain drain.
Greece would, by 2015, have grown itself partly out of debt, which, incidentally, economic history teaches us, is the way most debts are disposed of by economic growth. The fixed debt becomes smaller as the pie expands.
The real priority for Greece and Europe is a win-win scenario focused on an intelligent socio-economic development plan for the whole continent, including structural reforms both in Greece and in the European Union itself.
The July Agreement, also known as the Third Memorandum, does very little to address this priority.