Greece and the euro: The end of the affair

Graffiti by Absent

A few weeks ago, I was interviewed by a Danish journalist in front of Parliament. He took out a 2-euro coin, flipped it over and showed me the engraving depicting the mythological story of Europa being whisked off by Zeus, who transformed himself into a bull to achieve the task. It’s a scene that is usually known as the seduction, or even abduction, of Europa. “This coin shows the Rape of Europa,” the journalist said. “Do you think Greece is raping Europe or is Europe raping Greece?”

After picking up my jaw from the floor, I gave an inadequate answer about Europe and Greece having a consensual relationship that was going through a rough patch. “We knew all about each other when we climbed into bed together,” was my final repost to his jarring question. Of course, the truth is that seduction only really works when you don’t know all about each other. And, as we’ve discovered over the last few months, Greece knew little about itself, let alone about Europe, before becoming part of the euro.

Greece’s story over the last 10 years or so has been defined by its relationship with Europe and the currency that the Danish journalist held in his hand. Greece’s entry into the euro, the economic and political developments it gave rise to and the social and cultural changes that followed it have provided the context for the Greek narrative through the last decade and the beginning of this one.

Just like Europa, the Phoenician woman that so bedazzled Zeus, Greece was seduced by the power, prestige and promise of happily-ever-after that came with entry into the single currency. Who could forget, for example, the excitement and sense of achievement that many felt when Prime Minister Costas Simitis withdrew the first euro banknotes from and ATM at the beginning of 2002? It was confirmation that – as former Premier Constantine Karamanlis had once said – “Greece belongs to the West.” It was the culmination of a long and often bumpy road from the collapse of the military dictatorship in 1974, through the partisan but gradually progressive years of the so-called metapolitefsi, to – what many thought – would be guaranteed stability and prosperity. From being a fringe player in terms of European affairs, Greece now had access to the VIP lounge.

The potential rewards of joining the euro meant that Greeks were mostly willing to overlook the austerity program that Simitis applied to get the country into the single currency. But all good Greek myths have some kind of danger lurking in the background, and austerity was the one that defined this era in the country’s history. Entering the eurozone led to Greece casting off the shackles. We will come to the perils associated with this abandon later but for now, let’s focus on some of the positives.

Apart from newfound prestige, entry into the euro bestowed on Greece something much more practical: access to much cheaper credit. This formed the platform for an unprecedented period of sustained growth. It seems a long time ago now but, for a while, Greece had one of the strongest growth rates in the eurozone. These credit lines allowed Greek companies to spread their wings and soar beyond Greece’s borders. It was not long before Mastiha was on the tip of everybody’s lips and Korres was under their skin. Greek banks and business were able to establish dominant positions in neighboring countries as Greece became the big player in the Balkans. Maybe it was a big fish in a small pond but things were going swimmingly.

The flow of cheap money from Europe also allowed many Greeks to realize dreams of living like their friends in other parts of the continent. They were able to travel abroad for holidays and weekends more easily. They could stock their homes with the latest electronic and white goods and drive the same cars as Europeans from London to Lisbon and Paris to Prague. Young people suddenly had the chance to buy homes and cars – purchases that their parents would have only been able to make in their late 30s or 40s after putting money aside. Flourishing Greek banks were also happy to loan money to start-up businesses, allowing younger entrepreneurs to put their knowledge and skills to good use.

Rundown working class neighborhoods in Athens such as Gazi and Psyrri were transformed into hip urban hotspots. Greece rediscovered its own cuisine, albeit with a modern twist, as boutique tavernas and trendy eateries opened up one after the other. Athenians and visitors fell in love with the ancient sites, particularly the Acropolis, as the pedestrianization of Dionysou Aeropagitou allowed them to imagine walking with Socrates or lunching with Pericles. The opening of the new Acropolis Museum in 2009 was the crowning achievement in the effort to reconnect Greece’s past with its present.

In this positive atmosphere, Greece culture also blossomed. For a while, there wasn’t a wedding in the world that wasn’t big, fat and Greek, meze became the new tapas and the opening ceremony of the Athens Olympics a cultural reference point for people in all corners of the globe. Greek theater enjoyed somewhat of a revival and for only the second time, a Greek film – Dogtooth directed by Yorgos Lanthimos – was nominated at the Oscars. Greek music also reinvented itself, in some cases drawing on the influences of the past and present, such as through Imam Baildi’s fusing of rebetiko with hip-hop, to create a distinct sound – that of east meeting west and the past meeting the future. Even Greek sport enjoyed an unlikely moment in the sun with the national football team winning the European championship in 2004 and the basketball team doing the same a year later.

Entry into the euro also allowed Greece as a country to borrow at a cheaper rate. Enjoying a bond spread that was not far above Germany’s, the Greek government was able to finance better wages for public servants and major infrastructure projects. Plans for roads, bridges and public transport that had remained on the drawing board for years were being put into practice. The metro, a new airport and the Attiki Odos were all completed in time for the Athens Olympics in 2004.

The Games were a confirmation to the world that Greece had truly arrived. But they were also the point at which Greece had reached the end of the runway. Few realized then that even more effort was needed to get the country off the ground, rather than careering along the ground towards disaster.

No attention was paid to the fact that all these positives were also mirrored in negatives that nobody was prepared to tackle. While entry into the euro granted Greece a place alongside the big boys, everybody overlooked that free lunches aren’t served at this particular table. Joining the eurozone was the opportunity for Greece to create the basis for a dynamic economy that could survive the rigors of competing with the other members. The chance was missed. Instead, Greek governments were happy to lap up the structural funding and cheap credit that was served to them without thinking about how the country would eventually feed itself. There was no concerted effort to overhaul the public administration that stood as an obstacle to the country’s progress. It was not so much a question of size or cost of the public sector as of efficiency. But tackling this required a level of political will and vision that was largely absent during this period of Greek politics.

Simitis lost his way and control of his party soon after joining the euro and despite his successors as prime minister, Kostas Karamanlis and George Papandreou, being Greece’s youngest-ever premiership combo, the sound emanating from the political machinery was old and tired. Irrespective of euro membership, PASOK and New Democracy continued to treat Greece as their personal vehicle. Too much time, effort and money was spent on protecting their interests through the awarding of public contracts or hiring of personnel in the public sector. They promised reforms but rarely delivered them.

In terms of the public, there was a complete disregard for the implications of being part of a single currency. People were ill-prepared for the transition from the drachma to the euro, resulting in prices being rounded up and consumers being squeezed. The response was for cheap credit to bridge the gap. In the private sector, people turned to loans and credit cards while in the public sector, the government borrowed more to increase the pay of civil servants so they could keep up with the rising cost of living. In fact, if you go back and look at the statistics, Greeks proved to be the biggest patsies in the eurozone: while their wages rose during the last decade, the cost of living rose by much more. Even before the crisis struck, many people were worse off than they had been under the drachma – not that a return to the old currency now would be a panacea.

However, the borrowing and lending that went on to make up for this discrepancy left very little of value behind. The construction boom, for instance, proved little more than a bubble. Apart from providing work for day laborers, many of whom were paid off the books, its impact on the economy was far from what politicians and contractors – big and small – were making it out to be. The money that was lent to many entrepreneurs often proved little more than an avenue towards personal enrichment. The easiest, and most popular, thing for Greeks to do over the last decade was to open a store or business selling imported goods. The owner could sell at a big mark-up and make a tidy profit but the impact of this on the broader economic scale was death by a thousand paper cuts.

It is telling, as brand strategist Peter Economides has pointed out, that Greece had the most state-of-the-art broadcasting center in the world thanks to the Athens Olympics but after failing to find anything else to do with it, turned it into a shopping mall, and a luxury one at that. This move was symptomatic of the consumerist fever that afflicted Greece during the last decade. Borrowed money was being lavished on imported goods and little was being invested in research and development or production. Even Greece’s comparative advantage in tourism, boosted by the successful hosting of the Olympics, dissipated under the challenge of Croatia and Turkey. Rather than Athens, Istanbul became the place where west and east met. The seeds of catastrophe had been sown.

However, Greece also failed to realize that it was part of a fundamentally flawed currency union in which the countries on the periphery would struggle to stay afloat even if they paddled hard, let alone rested on their laurels. Greece’s greatest sin was being seduced by the idea that it could ride the euro into the future without making any effort on its own. Like many others, it overlooked the blinkered monetarist view that the European Central Bank subscribed to, or that a currency union without fiscal, economic and political unity would be doomed. It was satisfied with taking a back seat when France, and Germany in particular, began to shape policy in their own interests.

Greece also ended up being a passenger when the crisis really began to take a stranglehold on the country. It’s acceptance of the terms and flawed thinking behind the bailout exacerbated an already dangerous situation. And, as we stand on the precipice, waiting for either a grand response to this spreading crisis or the big fall, it is clear that Europe – not just Greece – is trying to discover itself. As it delves into its political reserves to find an answer to its existential questions, Greece should realize that it won’t be able to ride into the future on someone else’s back. The road ahead is long and full of obstacles and regardless of whether Greece remains in or out of the euro, Greeks will have to walk it. It started with a seduction but the affair is over now.

Nick Malkoutzis

This article was first published in the December 2011 issue of Insider Magazine.

8 responses to “Greece and the euro: The end of the affair

  1. Pingback: Operativo titoli di stato greci - Pagina 6702 - I Forum di Investireoggi

  2. A very good analysis of how & why Greece got itself into this chronic mess,
    refusing any medicine to make it better. Our politicians are like rabbits stunned by the headlights. What we need is new minds to see the problem from fresh angles, & start thinking of solutions that are out of the box, like Peter Economides who says that the private sector has to lead the stunned politicians forward showing them things that can work. In fact our politicians are actually stifling the
    country. Do we really need them? There must be some international court we, the citizens, should take them to for getting the country where it is now.

  3. An excellent article! If the political and economic elite of Greece were to share this kind of self-recognition, half the game for Greece’s future would already be won!

    Once in my early career years when I struggled to become familiar with the intricacies of sophisticated annual planning, a seasoned manager told me the following: “Just review the last year. What worked well in the last year, plan to do more of it the next year. And what went wrong in the last year, plan to do less of it!” This advice accompanied me throughout my career with great benefit.

    An annual plan won’t do the trick for Greece now but neither was today’s mess created in only one year. So, review the last decade and plan for the next one accordingly.

    By the way, if Greece’s standard of living was heavily a function of money flowing into Greece so that it could be used for the payment of imports, that doesn’t have to change radically simply because the debt flow into the country has come to a halt. Two things are required to achieve a “soft landing”.

    First, all those imports which could be substituted with domestic production should be substituted, therefore reducing the foreign money requirement (and generating domestic growth).

    And, secondly, regarding the foreign money which will still be required: try to get as much of it by way of foreign investment (which does not carry interest and does not need to be repaid) instead of debt (which does carry interest and needs to be repaid).

    Everything else can be derived from these two very basic assumptions. And, as an early Doris-Day-movie was titled: “Don’t just stand there!” (instead, start doing it!).

    There is no credible argument why Greek society should not be able to achieve a positive perspective for its future, if it only succeeded in marshaling its own resources; the materialistic resources such as business potential and, above all, the human resources!

  4. Greece could never have known that a bunch of Teutonic morons will become obstructionists galore nor that a weak PASOK government will give the store away without a serious negotiation like the Irish or the Portuguese did.

    Greece is getting loans from the ECB because German malpractice shut it out of world markets and then German idiocy proceeded with the systematic destruction of the Greek economy.

  5. This is the calendar(otherwise known as the worry list) of the German disaster in the making:

    –Friday, Dec. 30: EUR715 million of Greek debt falls due. Presentation of emergency Spanish budget measures.

    –Monday, Jan. 2: Euro-zone December manufacturing PMI.

    –Wednesday, Jan. 4: Euro-zone December services PMI. ECB 84-day and seven-day dollar operations.

    –Thursday, Jan. 5: French bond auction.

    –Saturday, Jan. 7: Spanish government deadline for unions and business leaders to agree on labor-market reforms.

    –Monday, Jan. 9: Possible meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy in Berlin

    –Wednesday, Jan. 11: ECB seven-day dollar operation

    –Wednesday, Jan. 11, and Thursday, Jan. 12: European Commission visits Danish presidency in Copenhagen.

    –Thursday, Jan. 12: ECB interest rate statement and press conference. Spanish and Italian bond auctions.

    –Friday, Jan. 13: Italian bond auction.

    –Monday, Jan. 16: Troika of international inspectors expected to return to Greece to resume talks on new bailout deal.

    –Tuesday, Jan. 17: Spanish T-bill auction.

    –Wednesday, Jan. 18: ECB seven-day dollar operation.

    –Thursday, Jan. 19: Spanish and French bond auction.

    –Friday, Jan. 20: Troika talks in Greece expected to end.

    –Monday, Jan. 23: Euro-zone January flash PMI. Euro-zone finance ministers meeting.

    –Tuesday, Jan. 24: European Union finance ministers meeting. Spanish T-bill auction.

    –Wednesday, Jan. 25: Preliminary data on the Spanish government’s annual budget deficit expected around this time. German January Ifo business climate index. ECB seven-day dollar operation. ECB three-month long-term refinancing operation.

    –Thursday, Jan. 26: Italian bond auction.

    –Friday, Jan. 27: Italian T-bill auction.

    –Monday, Jan. 30: EU leaders summit. Italian and Belgian bond auctions.

    –Tuesday, Jan. 31: Ireland’s troika of lenders releases its latest quarterly review of the country’s bailout. Greece aims to conclude talks detailing new EUR130 billion loan deal, debt-exchange program with private-sector creditors by this date.

    –Wednesday, Feb. 1: EUR25.8 billion of Italian BTP bonds due.

  6. The PSI is a disaster.

    The local banks, as well as all European banks, can borrow from the ECB at 1%.

    What’s the logic of requiring Greek banks and the Greek public sector to accept a 50% haircut and then oblige an 8% interest on the remainder under English law, removing any leverage Greece has under current Greek law?

    This is the equivalent of putting youself in a prison, locking yourself up and throwing the key away. Complete and utter nonsense of Germanic origin.

  7. “A 30-year low interest-rate loan to Greece could accompany the reversal of PSI (private sector involvement) to keep the financing cost on the Greek government as low as presently contemplated,” Orphanides, a member of the European Central Bank governing council, said in an article in the Financial Times.

    Orphanides said the end of 2011 saw questions raised about the survival of the euro that would have been considered taboo earlier.

    “What caused this dramatic erosion of confidence? Was it the result of fiscal profligacy, such as that revealed in Greece that marked the start of the slide? Was it the loss of competitiveness? Or current account imbalances?” Orphanides said.

    He said these were contributing factors but the eurozone also suffered from a broader problem: the incomplete design of the euro area – lax monitoring, inadequate enforcement of the rules and non-existence of a crisis management framework

    “It also points to the collective failure of eurozone decision makers to tackle this problem effectively. A failure that has been marked by a sequence of EU summits and aborted plans that have convinced some that a solution is beyond reach,” Orphanides said.

    He said two decisions proved costly for the eurozone: first, European leaders agreed to impose losses on creditors whenever a member state faced liquidity concerns.

    “The message to potential creditors was clear: eurozone sovereign debt should no longer be considered a safe asset with the implicit promise that it would be repaid in full. Private sector involvement (PSI) was the new doctrine.”

    And second, at the EU summits in July and October, European leaders decided to force losses on holders of Greek debt.

    The Greek PSI reinforced the idea that holders of eurozone sovereigns should be prepared to incur losses even under circumstances that would not necessarily trigger comparable losses for sovereigns outside the eurozone.

    “Unsurprisingly, as investors digested the implications of the two decisions they increasingly fled eurozone sovereign markets,” Orphanides said.

    The resulting contagion was evident in the deterioration of borrowing conditions for other eurozone member states after October 18 2010; July 21 2011 and October 26 2011.

    EU leaders have since reversed the PSI innovation but still failed to restore investor trust.

    A reason cited for this is that the December decision did not reverse the haircut on Greek debt. Rather, the eurozone leaders supported continuing the Greek PSI while stating that the Greek case was unique and would not be repeated.

  8. Time to jettison the plans to hit Greek creditors

    By Athanasios Orphanides

    Government debt markets are about trust. Before the crisis, all eurozone governments enjoyed the benefit of their collective trustworthiness, co-operation and solidarity in the form of favourable financing conditions that contributed to the wellbeing of Europe.

    Investor trust in the eurozone has been badly shaken in the past two years. The image of co-operation and solidarity has been shattered. As 2011 came to a close, questions about the survival of the euro that would have been considered taboo earlier began to surface. Following Greece, a number of member states faced difficulties refinancing their debts or lost access to markets altogether, despite the implementation of unprecedented fiscal programmes.

    What caused this dramatic erosion of confidence? Was it the result of fiscal profligacy, such as that revealed in Greece, that marked the start of the slide? Was it the loss of competitiveness? Or current account imbalances? Without doubt, all these were contributing factors. But the contagion that has spread to so many eurozone member states points to a broader problem: the incomplete design of the euro area – lax monitoring, inadequate enforcement of the rules and non-existence of a crisis management framework. It also points to the collective failure of eurozone decision-makers to tackle this problem effectively – a failure that has been marked by a sequence of EU summits and aborted plans that have convinced some that a solution is beyond reach.

    Two related decisions proved costly for the eurozone. First, following the summit in Deauville in October 2010, European leaders agreed to introduce a novel element in eurozone sovereign markets: the imposition of losses on creditors whenever a member state faced liquidity concerns. The message to potential creditors was clear: eurozone sovereign debt should no longer be considered a safe asset with the implicit promise that it would be repaid in full. Private sector involvement (PSI) was the new doctrine. Second, at the EU summits in July and October, European leaders decided to force losses on holders of Greek debt. The Greek PSI reinforced the idea that holders of eurozone sovereigns should be prepared to incur losses even under circumstances that would not necessarily trigger comparable losses for sovereigns outside the eurozone.

    The decisions that raised the cost of financing in the eurozone by introducing additional risk on private investors were not without a useful purpose. The PSI risk raised (disproportionately) the cost of financing of member states with larger projected levels of debt. Thus, it would serve as a disincentive to fiscal profligacy, thereby guarding against moral hazard and reducing the risk of future crises. Adding PSI risk could improve governance.

    Unsurprisingly, as investors digested the implications of the two decisions they increasingly fled eurozone sovereign markets. The resulting contagion was evident in the deterioration of borrowing conditions for other eurozone member states after October 18 2010, July 21 2011 and October 26 2011.

    The capacity to learn from mistakes is a hallmark of good leadership. As the existential threat to the eurozone became clearer, EU leaders changed tack. On December 9 a change in doctrine reversing the Deauville PSI innovation was announced. In future, the eurozone would adhere to International Monetary Fund principles. Leaders also agreed on a new “fiscal compact” to enhance governance.

    Unfortunately, despite reversing the Deauville PSI innovation, investor trust has not been regained. A reason cited for this is that the December decision did not reverse the haircut on Greek debt. Rather, the eurozone leaders supported continuing the Greek PSI while stating that the Greek case was unique and would not be repeated. But can the promise to abandon the PSI doctrine in the future be convincing while losses on Greek debt are imposed at present?

    Reversing the Greek PSI decision would help to restore trust. Could it still be undesirable? Consistent with IMF principles, one of the reasons for imposing the Greek PSI was to reduce the interest burden on the Greek government. But a serious limitation of their application in the eurozone is that the IMF principles examine a member state in isolation, ignoring contagion effects on other states. Reversing the Greek PSI decision would also raise the financing cost on the Greek government, but by restoring trust in the eurozone it would reduce the financing cost of other eurozone governments. Reversing the Greek PSI would benefit the eurozone as a whole. A 30-year low interest-rate loan to Greece could accompany the reversal of PSI to keep the financing cost on the Greek government as low as is presently contemplated.

    The key is to restore trust.

    The writer is governor of the Central Bank of Cyprus, a member of the ECB governing council and member of the ESRB steering committee

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