There are many reasons why you might not want to be George Papandreou, Antonis Samaras or Giorgos Karatzaferis, but this weekend in particular the leaders of three parties in Greece’s coalition government find themselves in the most unenviable of positions.
They are due to hold talks with Prime Minister Lucas Papademos on the measures that Greece will have to implement to receive further loans from the eurozone and the International Monetary Fund. But the leaders of PASOK, New Democracy and the Popular Orthodox Rally (LAOS) are walking into a lose-lose situation.
If they agree, then further austerity measures will have to be inflicted on the wheezing Greek economy. If they don’t agree, then Greece’s lenders won’t stump up any more money and, come March 20, Athens won’t have the cash to pay holders of two maturing bonds worth 14.5 billion euros. The three leaders will be signing off on Greece’s disorderly bankruptcy.
Greece’s politicians have backed themselves and the country into this corner. Their consistent failure to recognize the implications of the crisis and to develop a coherent strategy to tackle it has removed almost all of Greece’s options from the table. Their inability to agree on and conduct necessary reforms has exacerbated the recession and prevented them from having any bargaining chips in negotiations with the European Commission, European Central Bank and IMF.
Their failure aside, though, Papandreou, Samaras and Karatzaferis are being put in an impossible position by the troika. The insistence of Greece’s lenders that private sector salaries, including the minimum wage, should be slashed is baffling in an economic sense and explosive in a political sense.
If reports are correct, the troika is pushing for a 25 percent reduction in labor costs. This would essentially entail the scrapping of the 13th and 14th monthly wages and a reduction of about 10 percent in social security contributions. The troika has failed to make any case for the cuts other than it would increase Greek competitiveness. This rather nebulous concept has been rejected by labor unions, employers and politicians. Labor Minister Giorgos Koutroumanis presented a report this week that indicated labor costs in Greece had dropped by about 15 percent over the last two years and would drop another 8 percent this year without any interference from the government.
It has never been clear at which point the troika believes Greece would become competitive. Nor has there been any significant attempt to weave the wage issue into the dozens of other factors that affect competitiveness, such as taxation, bureaucracy, corruption, infrastructure, etc.
In talks with Papademos last weekend, Samaras argued that it would lead to the economy shrinking by a further 3 percent of GDP. In Greece’s frail state, this would be the equivalent of unplugging the life-support machine. Yet the troika is insisting that the political leaders put aside their opinions and agree to what is being put before them. As Henry Ford said, they can choose the car in any color they want as long as it’s black.
This take-it-or-leave-it strategy in such tense circumstances is folly. Firstly, it’s a replay of the mistakes that were made when Greece signed up to the first EU-IMF bailout. The particularities of the Greek economy were not taken fully into account and the particular weaknesses afflicting Greece, such as its woeful public administration, were not addressed.
Instead, Greece ended up with an ill-devised austerity program that drilled a great big hole in the bottom of the barrel and sent the Greek economy plunging through it. As Peter Bofinger, a member of the German government’s Council of Independent Economic Advisers, said on Friday, the program was “wrongly designed from the beginning” and has sent the Greek economy into a dangerous spiral.
Rather than repeat the same mistake, perhaps all sides should step back and think of the implications of their decisions. It would be encouraging, for instance, if someone with authority said: “Fiscal consolidation must proceed but at an appropriate pace. Decreasing debt is a marathon, not a sprint. Going too fast will kill growth, and further derail the recovery.”
In fact, someone did say that recently. It was IMF chief economist Olivier Blanchard. So, it’s perplexing that the Washington-based gund’s man in Athens, Poul Thomsen, should be one of those advocating drastic wage cuts that would knock the economy even further from the rails of recovery.
The other reason the approach to the new bailout is fraught with danger is that it puts the last semblance of democracy on the chopping block.
Greece tossed away its sovereignty by failing to control its public finances and create a productive economy and fair state. However, to prevent a country and its political system from having any input or say in the terms of an agreement is an affront to the ethos of the European Union and the principles it is meant to stand for.
Some will say that if Greece wants more money it simply has to sign up to the terms of the loan. But the situation is not as simple as that. This is not money that is being invested in Greece so it can grow its economy to pay off its debt. It’s money that Greece is borrowing in order to pay off existing debt, much of which is held by European banks. From the first bailout, only about 20 percent of the money Greece received went towards covering its own spending needs, the rest was for bond repayment.
The Greek bailouts are much more of a quid pro quo arrangement than European and Greek officials like to admit. Germany — or at least the German Finance Ministry — let the cat out of the bag last weekend with its leaked document proposing that Greece change its constitution to ensure the loans it receives be used for repaying debt first and that only any remaining money be spent on domestic needs.
“That is absolutely astonishing,” writes Tim Worstall, a fellow at the Adam Smith Institute in London, on the Forbes website. “These are harsher terms than the British Empire ever imposed, even backed up by gunboats and the Royal Navy.
“There really isn’t any way that a democratic government is going to sign up to that: or that any demos would allow their government to do so.”
However, it’s clear that even if it’s not forced to pass legislation in Parliament, every euro Greece will be lent will be spoken for, including the 30 billion for the recapitalization of Greek banks. This bailout – which will place 130 billion euros of debt on Greece just after it concludes the haircut with bondholders to save about 100 billion euros – would have served little purpose if European banks were fully protected from a Greek bankruptcy and the knock-on effect this might have in the eurozone.
Despite the long-term refinancing operation (LTRO) the ECB launched in December, as a share of equity, European banks are still highly exposed to the effects of a Greek default. “Belgian banks especially are in the red, with total periphery exposure being valued at just over 2 times equity,” Rebecca Wilder writes on the EconoMonitor website. “This means that if the Belgian banks were jointly forced to write down all periphery holdings to 49 percent of what they are holding on their books, their equity would be completely wiped out and technically insolvent.”
Since the only money from the second bailout that will be invested in Greece is the 30 billion euros for bank recapitalization, the country’s political leaders would have every right to question whether committing to new package would be wise. It might just be possible that saying: “Thanks, but no thanks” is the best option.
It’s a choice that would set Greece on the path to default, which will bring turmoil for its economy and financial system as the country would be cut off from markets and the banks would not have access to funding. The one thing that Greece has in its favor, though, is that it has cut its primary budget deficit (which doesn’t include interest repayments) by 18 billion euros over the last two years. It fell from 10.6 percent of GDP in 2009 to 2.4 percent last year. This means Greece is edging toward becoming fiscally self-sufficient, a target it should achieve later this year.
If Greece can raise on its own all the money it needs to cover civil servant’s wages, pensions, unemployment benefits and public spending then it may occur to the party leaders that it’s not in Greek interests to keep borrowing just to pay off existing debt. Athens might discover that hardball is a game for two players, not just the troika.
To adopt such a strategy, however, the country would need politicians with clear minds, good ideas and the wherewithal to see such a tough task through. They would have to be willing to stick with the structural reforms that have already been set out and rebuild the economy based on a completely different concept, one that focuses amongst others on production, innovation, investment, exports, tourism and renewable energy sources. The problem is that the politicians who would make this decision and the voters who would support this transformation have so far shown themselves to be lacking in the commitment and awareness required. An option that could free the country of its fiscal straitjacket might soon turn suicidal. Greece, it seems, can choose any course it wants — as long as it’s bleak.