Death by 11.5 billion cuts

Is there another eurozone country where you can witness a finance minister being barracked on his way into the office? Few of Yiannis Stournaras’s counterparts will experience the kind of close encounters he did last week as he was harangued by protesting steel workers on his walk to the Finance Ministry in central Athens. Stournaras remained calm, hardly quickening his step, but was left in no doubt about the exasperation of his sidewalk critics.

Perhaps Stournaras would have felt aggrieved to hear shouts of “You’ve destroyed us” given that he has only held his position for a few weeks. But the abuse was not personal, it was purely business. The trading of blame and frustration is one of the few activities still flourishing in this seemingly moribund country. For the protesters, Stournaras was simply the representative of a political system that has watched helplessly and acted haplessly as Greece slides into decline.

He is one of the many targets of abuse in Athens these days. The latest round of negotiations between the government and the troika on the cuts demanded to secure further bailout installments have brought back with a vengeance the sense of insecurity that has lingered over the country for the last three years. A fresh tug-of-war between Athens and its lenders is eroding the little confidence left. More talk of measures that have a direct and immediate impact on people’s livelihoods push further away any thoughts of stability or recovery.

In this climate, it is no surprise that the three-party coalition is treading carefully, reluctant to accept all of the troika’s demands and perhaps providing more counter-arguments on the specific cuts that should be made than the past. Despite coming in the wake of almost 50 billion euros of measures since the crisis began, this package of 11.5 billion in reductions and 2 billion euros in tax hikes is going to be the most painful of all.

For starters, the survival of the coalition – delicately balanced on the precipice created by the jolting of the political faultlines in this summer’s elections – depends upon being able to manage the new batch of measures. The parties each have to convince their supporters that there is good reason to abandon their pre-election pledges of renegotiating the bailout. Collectively, they have to convince the Greek public that further cuts are part of a winning strategy to lift an economic that has shrunk by about a fifth since 2008 out of its near comatose state.

This task is most difficult for Democratic Left Fotis Kouvelis. His party promised to hold back the reins of the troika but he finds himself being dragged through the thorny bushes of an intense fiscal adjustment. Three of his 17 MPs have already declared they will vote against the measures. Should this number rise by several more, the existence of Kouvelis’s party would surely be in doubt.

PASOK, battered from pillar to post at the recent elections, has no wish to sign its death warrant by associating itself with more brutal measures. In fact, its leader Evangelos Venizelos wants to distance himself as much as possible from the even deeper cuts to salaries, pensions and benefits that the troika has apparently demanded. His only hope of survival is that the worst of what is in this latest package is associated with Prime Minister Antonis Samaras and Stournaras rather than himself and Kouvelis. This seems one of the few ways PASOK, currently fourth in the polls behind neofascist Golden Dawn, could stop its slide into oblivion.

For Samaras, for so long the self-styled anti-austerity warrior, an excessive cut to wages and pensions would be morally and ideologically devastating. He will have difficulty reconciling the 11.5 billion euros in cuts as things stand. If the troika force him and his party to abandon their long-held claims that some savings could be made from reforming the public sector, not just by cutting people’s earnings, the core thrust of his economic argument would implode.

A coalition unable to hold on to even a modicum of its original positions would be left with nowhere to go, even after just a few months in government. But political survival is only one aspect of Greece’s predicament; society’s survival remains the key factor.

The reason that the coalition is standing on shaky ground is because society is restless. On Wednesday, tens of thousands of people will march through the center of Athens. One in four of those protesting will be unemployed, while one in three of the shops they pass will have shut down due to the crisis. Some will argue that is part of the process of creative destruction, or a necessary by-product of the internal devaluation, that Greece is undergoing. But three years into the crisis, the majority of Greeks have seen plenty of destruction but little in the way of creativity. Greece has reached the point of internal default, with the state refusing to pay some suppliers and reportedly attempting to strong-arm others into accepting a sizeable discount.

This is the result of a flawed adjustment program that failed to identify and prioritize key structural reforms and bailout that is recycling debt that an economically crippled Greece has little hope of paying. The only thing being created by one of the biggest post-Second World War fiscal consolidations ever seen is a complex of dead-ends: a country that can’t satisfy its lenders, an economy that is stuck in decline, a people running out of options and the absence of a way out.

In this atmosphere, it is perplexing that the troika, and the International Monetary Fund, in particular has chosen to intensify its dogmatism. Reports that the IMF’s representative Poul Thomsen rejected the savings Greece planned to make from structural reforms and demanded further cuts to wages and pensions suggest a troika that is oblivious to the political and social dangers of the consolidation program.

Some have interpreted this as an intentional manoeuvre by the IMF, which wants to make the Europeans face up to the fact that Greek debt is not sustainable and that the officials sector – the European Central Bank  and the eurozone – will have to accept some form of restructuring. While the issue needs to be addressed, the IMF’s crude way of forcing it onto the negotiating table – if that is what the Fund is doing – is a high risk strategy.

There is a world of difference between the Europeans discussing a new restructuring for Greece because austerity is becoming counter-productive and them being forced to give Athens another break because it lacks the political courage to pass more cuts. Over the last few days, the failure to agree on the latest austerity package with the troika has led to some in Europe having the impression that the latter is the case. Reports confusing fiscal and financing gaps have created the impression that Greece will suddenly need to borrow 30 billion euros more, thereby strengthening the impression that it is the so-called bottomless pit that some have suggested. Nowhere has it been made clear that as of next year, any money that Greece will be borrowing will be going towards paying debt, not to cover public expenditure.

See, for instance, the reaction of Michael Meister, a Christian Democratic Union MP in Germany, to suggestions that there should be a further writedown of Greek debt. “Where would it stop? We’re talking about loans from as recently as last year,” he told Bloomberg, before adding that it was “up to the Greeks” to make up any financing gaps.

The troika is due to return to Athens this week and some compromise is likely to be found but the fundamentals of the problem will remain. Agreeing the new austerity package will not resolve Greece’s situation and somehow all sides have to find their way out of the corners into which they’ve backed themselves into.

One factor that may play a part in concentrating minds is the apparent changing dynamic in Portugal, which as the Economist put it, has “in two short weeks gone from being a model pupil… to a cautionary example of the dangers facing governments which attempt to push austerity beyond the tolerance of long-suffering voters.” The Portuguese government buckled last week under public pressure over its decision to increase workers’ social security contributions, while cutting them for employers. This may end up being a landmark moment for the European debt crisis, as protests in Greece and Spain intensify.

The hope for Greece is that the limits to austerity and what it can achieve are becoming ever more visible to Europeans and that a more comprehensive method of tackling the crisis will be sought. Otherwise, a slow death, by 11.5  billion cuts lies ahead.

Nick Malkoutzis

50 responses to “Death by 11.5 billion cuts

  1. Some obvious observations:

    The present government is introducing nothing new that Venizelos hadn’t already signed. It merely complies to what previously has been agreed to. The painful realization that the previous Greek negotiating team was out of depth and didn’t know what it was doing, has nothing to do with the current measures. If by now we don’t realize that Greece – through Merkel’s PSI nonsense – has been sold the wrong set of goods then we are beyond hope.

    What needs to be done now in order to remedy the situation is still resisted by the same German obstructionist forces. Namely, the OSI – official sector involvement + direct recapitalization of Greek banks from the ECB (so that the Greece public sector is not burdened by new loans) and growing the economy again (through targeted investments) continue to be fiercely resisted by the same European ignoramuses who got us here in the first place.

    Therefore, instead of trying to attract European sympathy about the death of Greece by a 11.5 Billion cuts a more pragmatic approach would be to invoke justice and expose this abominable package of austerity nonsense Greece has been sold to by economic amateurs of the first order. Justice demands that those who have done wrong be punished and the victims of their dubious actions exonerated. And this is done not by begging attention for the injustice, rather by demanding in an unwavering manner that justice be done.

    • And here is a small example of Merkel’s mess from the Eurozone Crisis Guardian blog:

      IAN TRAYNOR: EURO BANK ROW IS A FIASCO IN THE MAKING

      The confusion today over whether the European Stability Mechanism will be used for direct bank recaptalisations (see 11.13) has “all the makings of a fiasco”, warns our Europe editor Ian Traynor.

      He writes that the row may well puncture the weeks of calm engineered by Mario Draghi and the ECB. That’s because the agreement to use the ECM to recapitalise banks directly appeared to be a real step forwards in fixing one of the root causes of the crisis.

      Ian explains:

      At their summit in June eurozone leaders pledged to break the invidious banks-sovereign loop which was weakening banks and worsening sovereign debt burdens.

      The way to do this, they declared, was to allow the bailout fund (ESM) to shore up banks directly rather than going via governments and increasing debt levels. But the wording was left deliberately ambiguous and before the ink was dry on the statement, senior German officials, being grilled in Brussels by gobsmacked German journalists, were squirming and heavily qualifying the promise to shore up banks directly.

      Tuesday’s statement from the triple-A Germans, Dutch and Finns amounts to the strongest caveat yet, hugely delaying if not reversing the June promise. Apart from ruling out direct help for banks from pre-existing cases, it describes use of the ESM as a “longer-term” option and as a “last resort.”

      Besides, it insists that the new ECB bank supervisor has to be operational and seen to be effective before the ESM use can be triggered. A very long time, in other words. Germany in June insisted on the new ECB bank supervisor for eurozone banks. But it wants the ECB to supervise everyone else’s banks, not the vast majority of German ones. It is stalling on establishing the supervisor. France’s Europe minister, Bernard Cazeneuve, said in Brussels on Monday the supervisor had to be established “urgently”. The Germans say the absolute opposite.

      And without the supervisor, there can be no use of the ESM to help weak banks directly. Catch-22 or going round in circles, as a matter of policy.

      And while eurozone officials go round in circles, the stock markets go down (FTSE 100 now down 68 points). The euro has also lost ground this morning, down half a cent at $1.286.

  2. From informations in the internet news and http://www.infoq.com/presentations/IT-Greece-Finance I got the impression that in the last few years Greece has implemented only some savings by torturing the weak persons but done nothing to drastically improve it’s tax authorities and remedy a bureaucracy working like in middle age.
    I also wondered why Greece did not accept the offering from Austia to help modernize public administration?
    >”The hope for Greece is that the limits to austerity and what it can achieve are becoming ever more visible to Europeans and that a more comprehensive method of tackling the crisis will be sought.”
    What I see from Switzerland is a fatal lack of Greece initiative to takle the crisis by comprehensive and efficient methods?

  3. From informations in the internet news and http://www.infoq.com/presentations/IT-Greece-Finance I got the impression that in the last few years Greece has implemented only some savings by torturing the weak persons but done nothing to drastically improve it’s tax authorities and remedy a bureaucracy working like in middle age.
    .
    I also wondered why Greece did not accept the offering from Austia to help modernize public administration?
    >”The hope for Greece is that the limits to austerity and what it can achieve are becoming ever more visible to Europeans and that a more comprehensive method of tackling the crisis will be sought.”
    .
    What I see from Switzerland is a fatal lack of Greece initiative to takle the crisis by comprehensive and efficient methods?

  4. The “Süddeutsche Zeitung”, one of the major and most influential newspapers in Germany, commented wrote under the title “When help [for Greece] ends”:
    – “there are essentially three possibilites: the EU countries can send 30 more billions to Athens, without knowing whether this will be the last time. Or they will end any help, send Greece into default and possibly out of the Euro. Or they decide to cancel some debts, by consequence EU taxpayers would, for the first time, really have to pay for Greece. But there is also a fourth possibility, which is completely up to the greek government: the government has to bring up the courage to make the present and past profiteers pay: the rich ship owners, the orthodox church and the tax fugitives.”

    I think this more or less reflects mainstream feeling in Germany and also other parts of Europe.

    • Thank you. We will take option #3 and we will also ask Germany to immediately stop having any feelings and being a further embarrassment to human civilization.

      • “. We will take option #3 and we will also ask Germany to immediately stop having any feelings and being a further embarrassment to human civilization.”

        This sense of entitlement is somewhat baffling. This option is not just up to “taking” by Greece; it is something that taxpayers in other EU countries will have to approve. I know that people in Germany, Netherlands and Finland are entirely frustrated by just the kind of entitlement rhetoric that you have here. If the leaders would push for it, they would face serious consequences in the next elections. Therefore this one is probably not going to be on offer.

        Likewise with #1. So, you’d better do something to get towards #4, unless you want to go for #2 which where things will drift in the end if you do nothing.

  5. I beg to differ. Option #4, any time. Supposing we – as in ‘ordinary people’ – had any legitimate options at all, which is a moot point.

  6. “The painful realization that the previous Greek negotiating team was out of depth and didn’t know what it was doing, ”

    I think this comment amazingly continues to shift the blame. That the problem would be with the Greek negotiation team of previous support packages agreed with Greece. That this is about how you negotiate some deals.

    The problem is that previous Greek governments have come up with a public economy which is spending far more than it is collecting in taxes. You can try to collect more taxes (hard) or try to spend less (opposed fiercely as we can observe) or both. Negotiation doesn’t change the figures.

    • From information in the internet news and http://www.infoq.com/presentations/IT-Greece-Finance I got the impression that in the last few years Greece has implemented only some savings by torturing the weak persons but done nothing to drastically improve it’s tax authorities and remedy a bureaucracy working like in middle age.
      I thus wondered why Greece did not accept the offering from Austria to help modernize it’s administration?
      >”The hope for Greece is that the limits to austerity and what it can achieve are becoming ever more visible to Europeans and that a more comprehensive method of tackling the crisis will be sought.”
      What I see from Switzerland is a fatal lack of Greece initiative to tackle the crisis by comprehensive and efficient methods?

    • No. All European problems boil down to a single denominator: Germany.

      http://www.protagon.gr/?i=protagon.el.8emata&id=18578

      • What? That it’s somehow a fault of the Germans that many countries are spending more than they are collecting in taxes? I don’t read Greek so that link is useless to me, but again, sounds like just continuing shifting the blame.

        Germans are not forcing others to spend more than they can afford. Germans may be in some ways benefiting from such overspending in the form of markets for their competitive export industries, but nevertheless the spending decisions are responsibility of the government in each country. Not Germany.

        (No, I’m not German.)

      • Feel to use Google translate and read it.

        Ignorance is not a defense.

      • Machine-translated gospel is no argumentation. Whether oscillating fans are standing up at a stadium or at the kitchen powered by the local coal plant, you just don’t know.

        Get a grip. Stop blaming Germans. If euro is not working for you, set up a currency, withdraw from EU and Council of Europe if necessary, devalue until balanced, hang spectacle-owners in lamp-posts until happy, go on living. Deal with the truth commissions later. That’s how much of the world survives.

        Or balance the budget. (That’s what most other EU countries, including Germany, have ahead of them. I just can’t expect that someone else keeps “borrowing” money to my country’s government, knowing that it will not be paid back.)

      • pjt:

        What’s your purpose of participating in this blog if you refuse to learn?

        Why do you feel that is my responsibility to reverse the compound lies and misrepresentations upon which your reality/perception is based?

        The reason we keep saying “it’s Germany” is because those in the know (about 99.999999999999999999999% of them) say “it’s Germany”.

        Why? Go and learn why.

        Type “causes of Euro crisis” and see what lands on your screen.

      • There are many Web pages that claim many things. A lot of them are rubbish. There are also the figures from national book-keeping of eurozone countries. Those are much harder to dispute.

        What I see here is just stubborn refusal to accept a fact: countries – public economies – cannot keep running deficits forever. It seems to me that the “cuts” or not only inevitable, but also a useful lesson.

        “Death by cuts” is a hyperbole. The sooner you balance budgets and get on with life, the better. The longer you arrange demos and riots, the harder it will be to recover.

      • pjt:

        There are deficits and there are deficits caused by austerity.

        When the crisis started Spain had a debt to GDP of about 30%. In Greece’s case the Merkel nonsense has increased the debt to GDP ratio by an additional 60% since we started following the “German” solution.

        We now know that at best Merkel is an amateur and at worst a complete ignoramus on matters of modern finance.

        Do you follow people in your life who they turn out to be idiots, incompetent or simply ignorant on the subject matter?

      • @Dean Plassaras: Sorry but I do not understand Greek language. But as an independent Swiss citizen I do know that simple finger pointing as you practise it with Germany lacks proven arguments.

  7. And note that Greece is of course not alone in this: other European governments are also spending more than they can afford. But with Greece, the problem is bigger and the government’s credibility as a debtor has been exhausted earlier.

  8. Deficits are not caused by austerity (although the continuing inability to adjust spending to incomes shows up as increasing deficit at a time when nobody trusts you with their money). Rather the opposite: need for austerity comes from having a deficit and a lack of confidence that creditors will be paid back.

    Spain and Greece have developed their problems in quite different ways, but for both of them, blaming Merkel is just plain silly. Germany is not without its faults, one of them being exceeding the deficit goals in early euro years, but they have since then fixed things. And it show, they have smaller deficits than many others.

    Calling Merkel names isn’t going to help Greece one bit. Rather the opposite: one of your best potential revenue streams is tourism. Scare and disgust the Germans away, and you’ll be even poorer.

    • Gentlemen:

      Because I happen to have aced all my macroeconomics classes as part of my Masters in Business Administration degree, let me tell you with absolute confidence (that I am right and you are not) that austerity of the public sector is something one ought to attempt during booming economic times. Under no circumstances public austerity is to be applied during contractionary phases of the economy. Because the negative loop created is self-defeating.

      This well known axiom is known to all economists of any gravitas, except Merkel and her entourage that is.

      As to your threat that the Germans will avoid Greece, I think it would be a very sensible thing for them to do. The Greek-German relationship has entered an irreparable phase. There is absolutely nothing you or I can do to revive something that is already dead.

      • Oh yeah, Keynesian economics and all that. That the government should borrow to invest in infrastructure to stimulate the economy when there is a downturn, and then pay the debt when there is growth.

        A great theory. Over here, we don’t need to do an MBA to learn the idea, it’s taught already in high school.

        But it’s supposed to be a two-way street. If you only borrow, and borrow, and can no longer even pay the interests, what happens? Nobody thinks you can pay it back. You lose your credit rating. And that isn’t the fault of credit rating agencies. Don’t shoot the messengers if you don’t like the news.

        Spending money you don’t have is quite okay as long as you maintain the credibility that lending money to you is a good business decision. Greece has lost credibility regarding that, and no amount of Germany-blaming is going to help. Quite to the contrary.

        It’s not “my threat” that German tourists avoid Greece. It’s an observation of further calamity that Greeks are bringing on themselves, by exercising the kind of rhetoric that you use.

        Of course, Greece may not be alone here, again. But the degree of state of denial seems to be unprecedented.

      • pjt:

        The formula (which by the way has nothing to do with Keynes or others) is as follows:

        GDP = C + I + G + (Ex – Im)

        where “C” equals spending by consumers,
        “I” equals investment by businesses,
        “G” equals government spending and
        “(Ex – Im)” equals net exports, that is, the value of exports minus imports. Net exports may be negative.

        C in Greece is negative due to austerity. I is subzero due to the German unsubstantiated threat that Greece will have to exit the euro. G is the part you want to reduce. (E-I) is negative for Greece, albeit improving.

        You don’t need to have a degree to understand that the only tool available for Greece is G which must increase.

        Otherwise the declining GDP makes the debt worse. We started at 117% debt to GDP in 2009 (start of crisis in Greece) and we are now at 165% going to 180%.

        From what sheet of music is Germany reading from? Is Germany so arrogant to suggest that it will rewrite economic equations? This is absurd. Not only you and others are hopelessly ignorant of economic theory but you insist on carrying a conversation which you are least qualified to participate in.

        I will ask you again and this time try giving a straight answer. Do you have any clue what you are talking about or are you inventing stuff as you go along to fit your ideology?

      • “that I am right and you are not” – lol!

        Dean, I have got a question.
        How it is possible that Francois Hollande, a Socialist and President of France, unveils “the harshest budget in 30 years”? An €36.9 billion austerity programme. Doesn’t he or his economic advisers know your axiom?

      • And I’ve got an answer for you flippa.

        Don’t you understand that the euro crisis has nothing to do with economics? That it is mostly a political problem?

        What do you expect “socialist” Hollande to do? Allow France to become the target of financial markets and therefore be devoured within seconds?

        When Merkel in 2008 basically declares that each EU-17 is on its own, which then allows markets to attack markets individually, what are single countries with the same currency to do? Don’t you understand that the euro is a currency of many flaws and that once you are part of it your fiscal policy options are limited?

        Say you are a herd of sheep and are attacked by a pack of wolves. The Merkel sheep declares that the best strategy is for the herd to split, allowing each sheep to be attacked individually. So what do you expect Hollande to do under such scenario? Of course the less intelligent sheep might be tempted to shed excess weight on the flawed premise that it could run faster.

        Does this look like a strategy to you or most accurately a short term tactic?

        Are you trying telling me that Frau Ignoramus is capable of a short term tactic? She is the least intelligent to even attempt such.

        Tell you what. Wait until the wolves catch up with the Merkel sheep and tear it apart. I might even join with a glass of nice Greek wine to make the kill go down a bit faster.

      • “C in Greece is negative due to austerity. ”

        Definitely not. C cannot be negative, as consumers are still consuming – even if what they eat may be what they themselves grow. Consumer spending may be declining due to consumers not having money, sure, but it is not negative.

        “I is subzero due to the German unsubstantiated threat that Greece will have to exit the euro. ”

        Likewise, I may be low but not subzero. And German opinions are here just one factor. Germany is not preventing others from loaning money to Greece. Why Greece cannot borrow more (at reasonable interest rates) is because *no one* thinks it can pay it back.

        “G is the part you want to reduce. (E-I) is negative for Greece, albeit improving.”

        I don’t particularly want to reduce G. It’s just that you can’t get the money to increase it.

        Where you actually *can* do something is increasing Ex and decreasing Im. To increase Ex, you can for instance stop hating the Germans and try to get them into the country as tourists. To decrease Im (and get some money to spend on G) you can tax fuel and other imports, particularly luxuries. That might even hit the Germans (who are making some of those luxuries for wealthy Greeks), which seems to be such a priority for you.

        “You don’t need to have a degree to understand that the only tool available for Greece is G which must increase.”

        I have a degree but that is irrelevant and a degree does not entitle anyone to throw wild accusations around.

        Sure. Print money to increase G. It won’t be euros, but there you are.

      • @Dean Plassaras: I happen to have read the original texts of Keynesian theories. I says that states must make savings in order to behave anticyclicly in case of depression.

        Unfortunately, most Keynesian followers never have read the original text or have just forgotten the most important premisises of first making savings!

      • H. Trickler:
        Unfortunately, most Keynesian followers never have read the original text or have just forgotten the most important premisises of first making savings!

        So true.

        People are Keynesian when there is a downturn (“we must borrow, it is stupid to reduce government spending in a recession”). But when there is growth, they forget all about Keynes. In good times, they’re not interested in reducing deficits. Instead they say that “it’s okay to have some debt, the government can invest and get better return for the money than the interest rate”.

        The outcome? Only modest, if any, reduction of debts in boom times. Catastrophic increase of debt in a recession. And in the end, what we witness now: anybody with money no longer trusts that government bonds are a good investment.

        Another thing of course is that Keynes’ theory is about counter-cyclical policies. And our recent problems are not really about cycles; they are about structures. Things like baby boomers of Western world entering retirement age, which means that all their pension funds now need to sell their stock and other investments and pay out the money they’ve promised to pay out. So who can afford to invest in stocks, who can get growth going? The Far East where people work hard (but are going to have their own age pyramid related problems in a few decades). A few who have become rich by selling oil. That’s about it.

      • pjt:

        Don’t get cute please. When we say consumption is negative, we mean from the base year of 2009.

        All of these components contribute to a lower GDP which in turn increases the debt to GDP ratio.

        The German formula is beyond contemptable on this score. It’s kind of idiotic.
        And the rest of you gentlemen, degreed or not, are missing a key point.

        This is our economy and you are just spectators to this. It would behoove the spectators to basically zip it and start taking notes, instead of trying to impose their own flawed perception on things.

        We are the ones affected by this and we are the ones to tell you how it should be. Not the other way around.

        As to this tiresome, repetitive German contribution to Greek tourism, I would strongly recommend that you keep flocking to Turkey instead where the cheapness and general exploitable conditions are much more akin to the German character (I am sure you heard the birds of a feather flock together theme). Greece is for classy folks not cheap skates.

      • When we say consumption is negative, we mean from the base year of 2009.

        Why cherry-pick that year? Why not e.g. the start of euro as physical money, 2002, or as account currency, 1999? Or Greek EU membership, 1982?

        But to continue with macroeconomic formulas, another way to look at the GDP, which should produce exactly the same result as the previous one – assuming that the statistics are not forged, of course – is this: GDP = COE + GOS + GMI + TP & M – SP & M.

        I.e. compensation of employees plus profits plus interests and rents, plus productiong&import taxes minus subsidies. And what ires people in the rest of EU is the perception that there is large-scale tax avoidance in Greece, connected to various subsidies. I.e. the way to increase GDP is to start recognising compensation of employees (which is now paid in cash to hand), rents (which are paid in black market), start collecting taxes on production and imports, and stop subsidies deducted from taxes.

        Some of this is of course just a perception. Lots of Greeks work hard and already feel they are paying too much taxes. But face the reality: someone here was shocked that 75 % of gas price in Greece is taxes. In many other places, that has been the norm for years or decades.

        There would be no austerity attempts in Greece if there were still governments, banks, and individual investors who would trust the Greek government with their money. However, there are none (except some who speculate with extreme interest rates). And no amount of Germany-blaming is going help with that. Rather to the contrary.

        And if you hope that your attitude to Germans raises ire, I’m afraid you’re failing here. Rather, the feelings are something between astonishment and pity. Very determinedly shooting yourself in the foot, I must say.

      • pjt:

        The reason that 2009 is the base year is because this is the start of the German medicine that failed.

        Regarding attitude towards the Germans, don’t blame me or the Greeks rather blame the Germans.

        We never asked for an amateur intervention in our economy and we never asked for liars and hypocrites to “help us” in anyway.

      • The reason that 2009 is the base year is because this is the start of the German medicine that failed.

        Hey, then just don’t take that medicine (if you think there is no illness). Find someone who is willing to borrow more money to you. That should be easy, right?

        We never asked for an amateur intervention in our economy and we never asked for liars and hypocrites to “help us” in anyway.

        So you don’t need anyone else to borrow more money, or guarantees, either, and we have nothing to quarrel about.

      • pjt:

        o.k. I got it. You win, I lose.

        BTW, the reason why Greece can’t borrow today (like many others) is because Germany chose after the US financial collapse in 2008 to declare that “each European country was to be on their own”.

        So, the markets got the message and attacked. But pretty soon the same markets will dismember Germany without mercy. Wait until the first downgrade of Germany and you will see how fast the sand castle will collapse.

        BTW, if Germany instead of spending months in indecision and directionless ignorance, would have allowed back in 2009 the ESM to provide no more than euro 50 Bil. of loan facility to Greece we wouldn’t be in this mess today.

        Instead naive Germany, which thought that time would cure the problem, is facing liabilities today which are beyond her capacity to survive them. Good job. The next time we wish to destroy the world, we know were to find you.

      • Sorry…where to find you.

        But I’ve lost already. It doesn’t matter.

      • BTW pjt:

        Someone in Germany must have asked the Chinese to help. And here is what the Chinese replied (pay special attention to the title):

        http://www.reuters.com/article/2012/10/02/us-china-russia-europe-economy-idUSBRE8910W420121002

      • Thanks for the link, Dean. In addition to Reuters’ headline, it is worth it to read the text as well. I quote a part of it:

        “The ECB is going in the right direction, with the support, most importantly of the Germans, which is crucial,” Jin, a former finance vice-minister, said

        Urgent reforms in the “peripheral” countries of the euro zone, which are shouldering the heaviest debt burden, must take place.

        “We have monetary policy hijacked by fiscal policy, which in turn is hijacked by the social programs – unless you solve the fundamental problems, this kind of ECB policy will not work forever.”

        NO INVESTMENT WITHOUT REFORMS

        The mass demonstrations in Greece and in Spain against fiscal tightening do not bode well for attracting investment into their debt, Jin said.

        “European countries, the people in Greece, in Spain, will need discipline. They should understand this is their only way out of their debt problems,” he said.

        “It’s not realistic to expect any Chinese investor, CIC included, to buy the bonds, which are not safe.”

        Emphasis mine. This is what I’ve been trying to say. If it is easier to accept it from a Chinese investor, so be it.

      • pjt:

        For those of us that are skilled in financial matters the whole Chinese position, as articulated by Jin, is nothing more than a repudiation of the German position. In summary, Jin says that there is no way for China to invest in the German created mess called Europe. Forget about the word delivery (which is standard diplomatic language) and look at the substance. In fact the art of diplomacy is to call you a fool in your face, while you think that the insult is for someone else.

        Regarding the race track; it’s a private investment with only a partial contribution(about 1/3rd) by the Greek state based on certain investment criteria. Usually such monies are not disbursed before the whole project is up and running. I could be wrong but the Greek state contribution is only meant as a move for the project to secure private financing. If it fails to do so (and there are many more reasons to believe that it will fail than not) then there is no obligation for the state to pay its contribution.

        There are certain criteria for approving projects of this sort (mostly tourism related) and one of them is the multiplier effect into other parts of the economy. Whether a formula 1 project in Patras is enough to secure a place in the already loaded and oversubscribed F1 schedule, it will be up to market forces to decide. Most likely the project will not make it, however the state does not wish to be known as the entity that killed it. Others would do the killing and the politicos will say that they did their part in supporting it to the extent they did. That’s how development works.

        This is just a move by the government to say that it’s doing its job in removing red tape and unblocking projects that might have a chance. However, neither the removal of red tape nor the unblocking guarantee that all other project components will fall in place.

  9. Phew, what an anti-german furor… I agree that austerity (as promoted by some germans) is not helpful, but it is not the only thing to blame. BTW, when I googled for “causes of euro crises”, the first hit was http://www.bbc.co.uk/news/business-16290598 where I could read:


    So what really caused the crisis?
    There was a big build-up of debts in Spain and Italy before 2008, but it had nothing to do with governments. Instead it was the private sector – companies and mortgage borrowers – who were taking out loans. Interest rates had fallen to unprecedented lows in southern European countries when they joined the euro. And that encouraged a debt-fuelled boom.

    Well, I think this is not so bad. Personally, I favor the inequality explanation – neoliberal politics, starting in the 80ies and spreading all over Europe (Greece as well as Germany) leads to an increased inequality (lowering taxes for high incomes and fortunes, especially capital yields, favoring tax evasion, lowering salaries, shortening of social welfare and budgets) and compromising public households (only poor people and the middle class need the state, so who cares if it goes down the drain and bankrupt). Together with a liberalized financial sector and increased private money looking for investments, this favours the development of bubbles, destabilizes public households markets and generally lowers demand from both individuals and governements. And yes, it is a problem that the governements spend more than they get as revenues. But the solution is not to cut on spending (of course, make the administration more efficient and less corrupt, and thereby the state more solid and robust which is for the good of all people who depend on it) but to increase revenues by reverting the sins of the past 25 years.

    • Emanuel, you got it right. Spanish state deficit was within reasonable limits but the (non public) investments in the housing bubble was foolish. I have seen myself the myrad of unfinished new villages in south Spain which will never find a habitant.

  10. Emanuel: “Personally, I favor the inequality explanation – neoliberal politics, starting in the 80ies and spreading all over Europe (Greece as well as Germany) leads to an increased inequality (lowering taxes for high incomes and fortunes, especially capital yields, favoring tax evasion, lowering salaries, shortening of social welfare and budgets) ”

    Hmm. If we look at actual figures, again, a different picture emerges.

    Social expenditures as percentage of GDP (OECD):
    year Germany UK Greece Spain
    1980: 22.1 16.5 10.2 15.5
    1990: 21.7 16.8 16.5 19.9
    2000: 26.6 18.6 19.2 20.4
    2007: 25.2 20.5 21.3 21.6

    Gini coefficients after taxes and transfers (Wikipedia/OECD):
    year Germany UK Greece Spain
    80’s: 0.251 0.309 0.336 0.371
    1990: 0.256 0.354 0.336 0.337
    2000: 0.264 0.352 0.345 0.342
    latest: 0.295 0.342 0.307 0.317

    Taxes on income and profits as proportion of GDP (OECD):
    year Germany UK Greece Spain
    2001: 10.4 14.3 8.0 9.5
    2010: 10.4 13.1 6.9 9.0

    What is clear is that Germany and UK have allowed income differences to grow just a little bit, and have slightly increased the social expenditures, while keeping tax level on income and profits the same. Greece and Spain have reduced income disparities in 2000’s while they have increased social expenditures dramatically (Greece over doubled as proportion of GDP) and over the past 10 years, decreased the level of taxation on income and profits as proportion of GDP.

    I don’t know how EU countries are “favoring tax evasion”.

  11. @pjt:

    First to Germany (UK might be a similar case, however I could not find comparable data for the numbers I would like to bring up; to Spain an Greece later on).

    Social expenditure: Yes, it is true that those numbers are rising. But likewise are the number of people who depend on welfare, giving a per-person decrease. A study of the institute of the german economy (conservative) mentioned that “the quota of people receiving social welfare rose from 1992 to 2007 by 6.5% to 37.8%” (all kinds of social welfare included; http://www.iwkoeln.de/Portals/0/pdf/trends01_10_1.pdf, abstract). In Table 1 in this study (page 3), some important cases are compared such as number of people with low salaries (strong increase), or the GDP which increased by 31% while the net average salary increased by 17%.

    Gini indices: Increase for Germany and UK seems very strong to me, you certainly know also the OECD study on inequality which supports the notion of growing inequality. http://www.oecd.org/els/socialpoliciesanddata/49499779.pdf

    Taxes: What you showed is IMHO not the number that counts. E.g. corporate tax rates in the EU countries decreased from about 30% to 22% (http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/tax_structures/2012/presentation.pdf page 10)

    To Greece and Spain: Yes, it is true that the Gini indices for those countries decreased, but: from a very high level, and, for what cost? We know that the growth, and thereby also the reduction in inequality was financed by overspending. Current austerity measurements are IMHO likely to reestablish inequality on the high level (not compared to the 17th century of course… but to what other european countries have), or, what I fear, presumably even higher. In other words, the decrease in inequality would be a spectre that will vanish soon.

    Tax evasion: I think the rather low tax discipline in Greece has been mentioned quite often in this blog. What concerns e.g. Germany, attempts to retrieve hidden money in tax havens such as Switzerland are relatively new. For decades, nobody cared about the hundreds of billions that people brought abroad.

    • Emanuel:

      Social expenditure: Yes, it is true that those numbers are rising. But likewise are the number of people who depend on welfare, giving a per-person decrease.

      Perhaps not quite so. Let’s look at things. How does this happen? One such mechanism – everywhere in developed countries – is that households become smaller. More and more people live alone. This is what they want: adult children move out from their parents’ place earlier because they can afford to. Unhappy marriages are dissolved and you don’t have to stay on with a violent spouse; instead you can find a flat of your own and move there. And then these people, who now live in smaller units with smaller household income, get some additional housing subsidies.

      This brings down the average household incomes even if average personal incomes increase. It also increases the social expenditures and welfare costs. Now, is this a sign of cruel cuts in social spending, or is it a sign of increased choice and better life for people? I think the latter more than the former.

      Gini indices: Increase for Germany and UK seems very strong to me, you certainly know also the OECD study on inequality which supports the notion of growing inequality.

      I think the notion is somewhat misplaced. Anyway, what should be observed here is that in Germany, the income disparity has increased, and Germany is doing relatively well economically. (As with Netherlands, Sweden, Finland). (And I say relatively; they are far from perfect.)

      In Greece and Spain, income disparity has decreased, and they are not doing well economically. The sample size is too small to say that this would statistically show that you should increase income disparity to improve the economy, but it is still a rather poor factual basis for a claim that the economic state of affairs in Greece and Spain is due to increased income disparity. Because income disparity has increased where things have gone relatively well, and particularly, has decreased in Greece and Spain who are in serious trouble.

      Taxes: What you showed is IMHO not the number that counts. E.g. corporate tax rates in the EU countries decreased from about 30% to 22%.

      I think that tax rates are pretty pointless if we don’t consider the tax base – i.e. what is taxed, what is deducted before we apply that nominal rate. In my country the nominal rate was brought from around 60% to around 22 %, and the tax revenues increased! Now, what do you think counts, the actual money collected in taxes, or some nominal rate which is actually not retrieving much money?

      And this is a particular point for Greece. There’s no shortage of laws, taxes and bureaucracy. But with a complex tax system with high nominal rates, you get a lot of people looking for loopholes. Increasing the rates won’t achieve anything except more tax avoidance. Simpler laws with less chances for avoidance is what could generate more tax revenue.

      • pjt, we can go on here forever, and I don’t want to interrupt your intense dialogue with Mr. Plassaras… Nevertheless a few comments…

        Social expenditure: It is true that household sizes change, i.e. decrease over the years. But I think the numbers don’t show that this makes people poorer, in that they have to apply more often for social welfare. See the numbers in http://www.diw.de/documents/publikationen/73/55742/diwkompakt_2007-026.pdf page 91 – showing that on one hand, one-person households can spend more than 50% of what two-person households (without children), and that they do not spend much more for compulsory items such as housing (29% for one person household compared to 25% for two), so they have a similar amount of money for free use. In addition the birth rate goes down, and children often lead to decreased income and higher need for social welfare. I think that household effects balance each other more or less out. If so, then we have somewhat decreased (or we can also say unchanged, the point is the same) spending per person.

        The statistics I cited above show that the percentage of people with low salaries increase, and that salaries don’t grow as much as the GDP. What the people don’t get as salaries (and hence goes to e.g. shareholders) has to be filled up by the state in the form of social expenditure. Consequence: Increased private wealth, increased inequality, increased public debt.

        You state: “In Greece and Spain, income disparity has decreased, and they are not doing well economically. The sample size is too small to say that this would statistically show that you should increase income disparity to improve the economy, but it is still a rather poor factual basis for a claim that the economic state of affairs in Greece and Spain is due to increased income disparity.” – you mentioned the small sample size, which does not allow any conclusions – we could also say that the source of all trouble in Greece and Spain is the higher inequality in the 80ies. And, it might be true that Germany and UK are doing better (although I would doubt that this holds true for UK) in macroeconomic numbers, but especially in Germany a large and increasing percentage of the population does not get anything from increased german wealth (as a recent wealth report by the governement showed). I would say this is also a strong reason why many people in Germany are against any bail-out actions.
        Actually, what I wanted to say was simply that there is quite some evidence that inequality increases. The connection equality/growth is something else again, also I would also say the sustainable growth and social stability is favoured by lower inequality.

        “Now, what do you think counts, the actual money collected in taxes, or some nominal rate which is actually not retrieving much money?”
        Both matter, of course. If we consider that corporate profits rose massively (e.g. http://oldprof.typepad.com/.a/6a00d83451ddb269e2015437761572970c-450wi for US, I didn’t found anything for EU on the spot, but I think it looks similar) in the past years, much more than tax revenues, the decrease in tax rates is one reason for the high public debts (see also the point above about salaries) and for increased inequality.

        Considering your last paragraph, I fully agree.

  12. Emanuel: If we consider that corporate profits rose massively (e.g. … for US, I didn’t found anything for EU on the spot, but I think it looks similar)

    Actually, I think I disagree about this. It is a myth. Not for US, but for Europe. At least it is a myth that is often repeated about Finland and Britain, and in both of them, the myth is mostly wrong.

    Here’s what I wrote recently about it for Finland:
    http://ptaipale.blogspot.fi/2012/08/those-evil-capitalists-and-their-gains.html

    Here’s what Tim Worstall has written about it for Britain:
    http://www.forbes.com/sites/timworstall/2012/09/11/trades-union-congress-misleads-with-statistics-on-wages/

    Essentially: wages as proportion of GDP has gone down somewhat, yes, but that is not primarily due to proportion of profits going up. It is primarily due to proportion of taxes on production and imports going up. It’s not the corporate leeches that are sucking up the money. It’s the government leeches.

    I’d be interested if someone would bother to dig up the same statistics for other countries – say Germany, France, Switzerland.

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