Milking Greece

When there are riot police in full gear standing in front of the Finance Ministry to protect it from disabled protesters riding wheelchairs and using walking frames, you can be pretty sure your country is heading in a worrying direction.

The protest by disabled Greeks, including Paralympians, who face cuts to their benefits as part of the latest austerity package, was just an entrée ahead of the main course of protests and strikes expected over the next couple of weeks as the governments gets closer to sealing the 11.5 billion euros of spending cuts the troika has demanded.

The fact that Greece’s disabled – who live in a country that already does everything it can to lay obstacles in their path – will soon have to survive on lower benefits speaks of the growing social cost of the crisis.

Ultimately, though, their opposition and disquiet will hardly register. Their protest will be overshadowed by the unfurling of banners by groups that carry greater sway in the decision-making process.

Already this week, police, firefighters and coast guard officers have taken to the streets. Judges are due to begin two to three weeks of protest action from Monday. The fear of further deep cuts to public sector salaries are threatening to undermine the very functioning of the state, as those suffering the reductions, the pillars on which the country rests, resist what they see as excessive intervention.

This discontent threatens to transform Greece from a faltering state to stalled state. There has yet to be a convincing argument made by the government or the troika about why cuts equivalent to about 6 percent of Greece’s fast-retreating GDP will be conducive to economic recovery. So, reports of further reductions to pay, pensions and benefits as well as the possible scrapping of the tax-free threshold and increase in retirement age are received by the public as the clattering of two empty entities: the directionless Greek government and the dogmatic troika, determined to exact its pound of flesh.

This morale-sapping theater is now in its eighth act. Greece has received seven bailout instalments since May 2010. Almost each one has been ushered in by the same tug-of-war we are witnessing now. Each time, Athens has failed to deliver on its ambitious promises, each time the troika has ratcheted up the pressure, pushing down on all the sensitive spots it can identify with all its strength. Each time, Greek society is poorer, wearier and less certain of its future. Each time the government finds it more difficult to manage politically the passing of a new round of measures that suck money out of a choking economy.

This time, things are a little different, though. Greece remains well off its reform targets but on the fiscal side it is ahead of schedule. Budget expenditure for the first eight months of the year was 5.9 percent better than the target. Revenues were 4.7 below the target but rising. Overall, the primary deficit had been slashed to 1.29 billion euros, some 70 percent better than the target.

The numbers reflect the repeated cuts and tax hikes of the last three years, they also speak of the sacrifices being made by a sizeable part of the population. Greece has something substantial to bring to the table this time. On the other side, the troika has little to show for the moment. Greece has been starved of funding and the butt of scorn since the summer. Its lenders are dangling the carrot of an extension to the fiscal consolidation period, even though the bailout expressly allows for extra time if the recession is worse than forecast. This week, Portugal was granted with minimum fuss an extra year to meet its targets for exactly this reason. In Greece’s case, the recession is on course to be at least two times deeper than the memorandum estimated but the decision on an extension is being dragged out.

Meanwhile, the promised tranches have been delayed, the vitally important bank recapitalization has stalled and Friday’s Eurogroup meeting indicated that the next loan instalment might not arrive until November.

Greece is being run dry as it is kept waiting until the latest measures are agreed. The coalition government – whose formation is a rare achievement by Greek political standards – is coming under greater stress by the day as it moves further away from its election pledges and closer to policies that threaten its cohesiveness. The pressure to fire civil servants is forcing New Democracy and PASOK in particular to come face-to-face with the destructiveness of its past.

Perhaps the troika sees this as the only way it can prize out the concessions it wants. The problem with this tactic is that for many Greeks – perhaps enough to tip the country into a morass – it will simply compound the impression that their government is accepting a diktat to appease European political and public opinion, rather than reaching a negotiated settlement on how to escape from the crisis.

The most notorious diktat – in fact the one that provides the origin of the word – was the Treaty of Versailles, in which the victors of the First World War imposed impossible terms on defeated Germany. John Maynard Keynes warned soon afterward that the crippling pressure put on Berlin would be counter-productive.

“If Germany is to be milked, she must not first of all be ruined,” he wrote. Keynes’s assessment is as true today as it was then.

Nick Malkoutzis

21 responses to “Milking Greece

  1. A long-term friend of mine whom I have to keep anonymous but who is a VERY senior ECB-official recently told me the following: he had been in conversation with a top Troika-official and asked him what he “really thought about Greece”. The Troika-official’s reply was that Greece would reach equilibrium when it had reached the national income level of Bulgaria.

    Now, I don’t know what was meant by “national income level” and where Greece stands today relative to Bulgaria. My friend couldn’t tell me offhand, either. My guess, however, is that the Troika seems to feel that Greece must still shrink a lot further.

    • Well, at half the per capita GDP of 2011 (in $US constant prices, World Bank) Greeks would still be 2to3 times better off, compared to Bulgaria.

    • Thanks for sharing Klaus. The question is how do you manage the political and social fallout from such a drop? For the troika, it’s easy: they’ll get up and leave. For the rest of us?

    • Klaus:

      I don’t think this position is supported by facts. If you go to the website tradingeconomics.com and you look up the Real (as opposed to nominal) GDP for Greece you get that the real(constant prices) GDP of Greece is roughly euro 176 Bil.

      http://www.tradingeconomics.com/greece/gdp-at-constant-prices-imf-data.html

      When doing the same for Bulgaria the real GDP is 45 Bil. in the local currency:

      http://www.tradingeconomics.com/bulgaria/gdp-at-constant-prices-imf-data.html

      Given that the conversion rate is 1 Lev = 0.5 euros, it means that the real Bulgarian GDP is roughly euro 22.5 Bil.

      Given that the Greek population is roughly 10 Mil. and Bulgaria’s 7 Mil., the approximate per capita real GDP for Greece is then roughly euro 17,600 and for Bulgaria euro 3,143. This means a difference of rougly a factor of 6. Too big to bridge.

      And as such the idea of the Greek GDP equalling ever the Bulgarian GDP is purely for impressions gaming.

      The reasons we have to use real GDP (constant prices) vs. nominal (usually quoted) is to account for different rates of inflation. Because you can’t compare 2 different inflation environments. It would be the equivalent of comparing apples and oranges.

  2. Greece does not have to stay milked. It can stop asking for loans from others, and then there will be very little that others will say about things in Greece.

    I find it odd that the government does everything it can to lay obstacles in the path of the disabled. I suggest that the Greeks change the government to something that does something more productive, or at least less harmful.

  3. This week, Portugal was granted with minimum fuss an extra year to meet its targets for exactly this reason.

    Don’t underestimate how sick and tired citizens, civil servants and politicians are about the antics of the Greek politicians. Concerning Portugal a remark by the Dutch Finance Minister, De Jager, is very revealing. I transate from a Dutch newspaper:

    De Jager was positive about Portugal. The county is well on its way with the agreed cuts and reforms. Therefore, the southern European country can take a little longer to meet the agreed goals. “Portugal does not complain constantly, like we have seen with the Greeks”, said De Jager. http://www.volkskrant.nl/vk/nl/2680/Economie/article/detail/3316078/2012/09/14/Geen-beslissingen-over-Griekenland-voor-half-oktober.dhtml

    That’s very strong language. He put it a bit more diplomatic at Bloomberg:

    “Portugal has been granted an extra year time line, but they did not ask for any more money from the European side,” De Jager said. “What happens is that you do not delay your measures but because of external factors you are reaching your deficit target somewhat later than first planned. That is not such a problem for us.” http://www.bloomberg.com/news/2012-09-14/de-jager-says-greece-could-receive-extra-time-not-more-money.html

    These officials are very well briefed on comments by the Greek government spokesman Kedikoglou this week: “He added that a pay reduction (6 percent) for law enforcement and military personnel, which is among the proposals in an 11.5+ billion-euro package of austerity measures, must be restored as soon as possible — echoing previous statements by the government that pay cuts for such personnel will be restored when the state’s finances improve.”

    So much for the adjective ‘structural’ with the noun ‘reforms’. They are meant to be temporary. At least for these ‘special cases’. Or has anyone heard these things uttered when pensions and benefits for disabled were slashed? I sure haven’t…

    Is all this unjust to the Greek citizens? Yes, very. And I don’t know a acceptable solution to this deepening nightmare we are living in.

    • Thanks for the insight Anton. One of the problems is the way the Greek issue is being perceived. The magnitude of the Greek cuts are way beyond what Portugal has had to do. The same goes for the depth of the recession. Where Portugal has outpaced Greece is in terms of reforms. It’s public administration is in a much better shape and can therefore implement decisions. It also has a history of privatisations, which makes it a simpler task to sell state assets.
      The other big factor here is that Portugal has been able to communicate its story much better than Greece. Earlier this year, it signed a US consultancy firm to handle its PR. Meanwhile, the spotlight has fallen on Greece, which has come away seeming the bad child in the class. The inability of the government and country at large to combat this image over the last three years has cost Greece a lot, as De Jager’s comments confirm.

  4. I agree that things are going very wrong, also due the dogmatic troika. Perhaps the deficit should much more tackled by increasing revenues instead of reducing costs. This may include fighting tax evasion. Or, for example, as greek friends told me this week in Athens, petrol for cars is taxed with 60%, while ship fuel is taxed only with 5%, which not only decreases revenues but also presents another source of inequality since most ships are owned by the few oligarchs in Greece.
    Increasing revenues will not only require more time, but, and I think this might be crucial from the troika’s point of view, it is simply not believe to happen in Greece, and this might also be a difference to Portugal: From the outside, there is simply no trust that the greek administration can reform itself and become more stable and less corrupt, the famous daughter of the one-day president of the parliament just being another example.
    By no means I want to defend the troika, since their „strategy“ seems both naive, helpless, fatalistic. But perhaps they simply hope that if the pressure is increased enough, the greek population will put their state on solid grounds (for that IMHO an emancipation of the middle classes from the oligarchs will be crucial).
    Well, I am not qualified to judge anybody in Greee. But, as you mentioned, as long as the various pressure groups, judges, policemen, disabled persons, are just going to fight for their own respective interests, and there is no force in the society that can reconcile various interest groups and propose a „new state order“, I don’t see how Greece can sustainably recover.

    • Or, for example, as greek friends told me this week in Athens, petrol for cars is taxed with 60%, while ship fuel is taxed only with 5%, which not only decreases revenues but also presents another source of inequality since most ships are owned by the few oligarchs in Greece.

      I don’t quite get the point about inequality here. Fuel for ships is a different market than fuel for cars; aviation fuel is practically 0% tax everywhere. This is not considered an “inequality” elsewhere. In North Europe, petrol tax has been up to 75 % although with rising crude oil prices and partially fixed per-litre duties, the percentage has now come down to about 57 % for Finland (the northernmost euro country).

      • As an example what is meant by that – with some very arbitrary numbers:
        if 10 million people pay 60% on their petrol, so let’s say 3 billion euros for about 5 billion liters. On the other hand, 10000 people (rich shipowners – what I have been told this number is not completely wrong) pay as part of their business 5% for another 5 billion liters, this gives about 250 millions. If taxes would be shifted to 55%/10%, then total revenue would be the same but a lot of not so rich people would save some money, while a few rich people would become a bit less rich.

        That aviation fuel is not taxed is yet another – also ecological – problem. However, in Greece it is also a matter on how increases in revenues/spending cuts are distributed: by measurements that hit a few very rich people such as increasing taxes on ship fuel, or general increases in income tax or cuts e.g. in the health system that affect many more.

      • Emanuel: If taxes would be shifted to 55%/10%, then total revenue would be the same

        No, it wouldn’t. That’s a fault in the whole idea. And if Greek public economy were based on this kind of thinking, it would be in even worse shape than now.

        Taxation often has an impact on behaviour of those who are taxed. Changing tax rates and assuming that economic behaviour nevertheless stays the same is just silly.

        Anywhere, in any country, the same fuel may be taxed differently for different purposes, different markets. In all countries, end consumers typically pay a lot more tax than, say, industry, or ships, or aviation. In many countries, there are VAT refunds for sales to tourists. Etc ad inf. The Greek are not particularly “milked” by 60 % petrol tax. That’s completely normal for Europe, an rather unavoidable with the extent of public sector spending we have.

      • I am not quite sure what Emmanuel is getting at.

        Greece uses roughly $12-$14 Bil. in annual petroleum (crude oil) purchases. If Greece were to convert to a natural gas economy (CH4) and assuming a 70% conversion the annual savings alone would be about $6 Bil. There are also other benefits as well and their estimated NPV you could find here (a rough and dirty calculation):

        https://docs.google.com/spreadsheet/ccc?key=0AhDio482GnisdHZIZ3RscG1FZjQwUkJvdmRnbzRtTUE#gid=0

        Going back to your point of wealthy Greek ship owners, I think most if not all of them are based outside Greece and their fleets as well.

        Because the Greek islands depend on naval connections for commerce, supplies and transportation the ship fuel is partially subsidized by the state. So, this might be the part you are referring too. But almost all of such fuel is for ferry connections connecting the islands to the mainland and it’s seasonal. It also relates to tourism; so it might be tough trying to segregate its value breakdown and justify its pricing. One thing is for certain: wealthy Greek ship owners do not get their ships refueled in Greece. They do so around the world where their fleets are in constant movement.

  5. I am aware that my example is not very realistic, and also that raising taxes on fuel ship might have unwanted secondary effects. My point is essentially the following: a recurring issue in reports from Greece is that there is a relatively small group of very wealthy people with huge influence in economy and politics, and that this group also now in the crisis vigorously defends its privileges. The greek friends I mentioned, who told me that thing about the petrol taxation, very often referred to this situation that the country is being dominated by this small upper class that influences politics as they wish. It could be that ship fuel thing is not getting to the point, for that I am not enough into the shipping business… Still, I believe that the general concern about the privileged upper class that does not contribute anything to resolve the current crisis holds true.

    • That ship or aviation fuel is taxed differently is not a “privilege” of the “upper class”, and it is also not a phenomenon specific to Greece. Bringing up the differences in fuel taxation and the wealthy people looks to me more like shifting the blame. The ship fuel is not there for the personal benefit of the ship-owners. It’s a business cost, and even the zero-tax fuel cost is no doubt deductible from profits before calculating capital gains for any tax, as should be. Same goes with aviation fuel. Many governments would love have higher fuel taxes also for the internationally mobile transport industries, but they know that the instant they try to do it, the business will go somewhere else, and then there is no tax revenue from fuel, and also other economic activity and tax revenues will vanish.

      If rich Greeks use fuel of their merchant fleets in their personal yachts, that’s something that should of course be taxed (or prosecuted in cases where tax evasion happens). If you can prove it, just report it to the tax authorities; with some Germans looking over their shoulders, they might be inclied to react even if before they weren’t.

  6. Pingback: Disabled politics | Bailout Politics

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