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Like many of the important discussions in the economic world today, the
negotiations between Greece and its European creditors has become
increasingly absurd (see "A Patient Fed Considers Losing
Patience" in our latest newsletter). Late on Friday, February 20,
in a tense meeting between the new Greek Finance Minister and a host of
ministers from 19 Eurozone countries, Germany apparently 'authorized'
negotiators to accept a four-month extension of the $272 billion bailout so
long as the Greeks promised to make a series of difficult fiscal steps needed
to stay solvent over that time frame. Given that they desperately need the
money, it should be no great surprise that the Greeks complied.
This of course put Greece's new left wing government, led by Prime
Minister Alexis Tsipras, into a difficult position. After all, his Party had
recently come to power on the promise that it would not extend the bailout
and that it would no longer negotiate with creditors. To save face, he
insisted that the new austerity commitments, which would likely be the same
as commitments previously agreed to by the former government, would at least
be "self-imposed" by the Greeks themselves, rather than crammed
down by creditors. This fig leaf apparently provided enough cover for Syriza
leaders to claim victory in its first battle with the creditors.
It should also come as no surprise that the Greek policy blueprint, which
was delivered under the deadline, was largely vague and came with no new or
novel approaches to fiscal sustainability. Notably the document did not touch
any of the "elephant in the room" issues like the size of public
pensions, revisions of Greece's sales tax, and the sale of state-owned
assets. Instead they promised to do the same thing that nearly every Greek
government has promised to do, namely crack down on tax evasion, government
corruption, and smuggling, etc.
The policies were accepted with muted relief by most Europeans (as they
were preferable to the provocations that had been issued by Athens in the
first few days after the elections). The official European Commission statement
on February 24 said that it considered the proposals to be "a valid
starting point for a successful conclusion of the review."
However, others could not even muster this tepid enthusiasm. In a letter
to Eurogroup President Jeroen Dijsselbloem, IMF Managing Director Christine
Lagarde, who is not known for fiscal hawkishness, noted that "there are
neither clear commitments to design and implement the envisaged comprehensive
pension and [valued-added tax] policy reforms nor unequivocal undertakings to
continue already-agreed policies for opening up closed sectors, for
administrative reforms, for privatization, and for labor market
reforms." In other words, she is looking for substance that is not
there. This is a theme that can be traced in a great many discussions about
our debt-fueled global economy.
The real issue, that no one is fully prepared to address, is whether
Greece's decades-long experiment with failed debt-financed socialism will be
allowed to survive much longer.
Eurozone membership gave Greece access to vast amounts of cheap debt,
offered largely under the assumption that a single political union would
offer an implied EU guarantee for Greek debt. As a result, for years Greek
governments were able to borrow almost as cheaply as German governments, even
though the Germans had far superior fiscal health.
But for a while this debt accumulation was looked at as a sign of health
(much as it is now in the United States). Between 2002, when she entered the
EU, and 2007, when the Great Recession hit, Greece was a 'growth champion'.
Indeed, her economic growth exceeded even that of the U.S.
Under the camouflage of debt-financed liquidity, massive consumption
erupted in the public sector and flooded into the private sector. However,
the debt crisis of 2007-8 revealed this over-consumption combined with major
gaps in productivity and competitiveness, especially under a strong euro
currency. This led to serious recession.
It was this gravely flawed economic model that Germany hoped to dismantle
through its 'austerity' demands. But as you can imagine, the Greeks
themselves have clung to this fairy tale as if it were their birthright.
A 2012 McKinsey and Company report, Greece 10 Years Ahead, highlights
five key areas that need to be reformed before the Greek economy can become
viable.
- Large scale business operations had been discouraged by
hostile regulations. The generally small scale of businesses that
remained, combined with over regulation, complex and restrictive
licensing, and a highly volatile tax framework, has deprived the Country
of an industrial base sufficient to support its spending.
- The public sector had become too expensive and offered
low quality output.
- A framework of collective, inflexible, and binding labor
agreements had led to a disconnection between education and the job
market, which led to reduced innovation and under representation of
women and young adults in the workforce.
- A cumbersome legal and judicial system led to an over
abundance of vague and sometimes conflicting laws, which discouraged
economic activity.
- Widespread tax evasion, which had become endemic in
Greek culture, had led to substantial wealth creation outside the formal
economy, and had led to a seemingly permanent fiscal shortfall.
These are the issues that any successful policy proposals need to address.
Little doubt that the Germans have scoured the Greek proposals in vain
looking for signs that these great challenges will be confronted in earnest.
Instead, they were likely treated to idle posturing and promises.
It has long been recognized that the ability to repay a loan is secondary
to the willingness to repay. Many argue that Greece could repay much of its
$365 billion in debt if she wanted. Greece has numerous islands affording
valuable sea front real estate that could fetch billions on the open market.
In addition, according to the World Gold Council, Greece holds still 112.4
tonnes of gold. Apparently, however, Greece is unwilling to use any of its
national assets to satisfy even a part of its debts.
It is likely that for the sake of unity and stability, the more stringent
German demands for restructuring will be pushed aside. Fears of a Eurozone
collapse perhaps even eclipse fears of deflation as the single greatest
anxiety of European politicians. However, resistance to 'easy' terms for
Greece is stiffening in Northern EU nations like Finland, Holland and even
France, where Eurosceptic Marine Le Pen has seized on the issue with some
success. Now, even in Southern nations like Spain, the government wants stiff
terms to avoid encouraging its own Eurosceptic Podemos party.
In short, the solution to the Greek debt crisis is likely to be political.
Effectively, it will likely seek to expand the central control of the EU with
a covert transfer of wealth from rich to poor nations. Typical of socialism,
hard working citizens will be left to pay for the political and economic
errors of their masters. As President Reagan said, 'Socialism only works in
two places: Heaven where they don't need it and hell where they already have
it."
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