Paying the cost of the crisis

The news earlier this month that Greeks, acting on fears the country might exit the euro, transferred 30 billion euros to foreign banks, many of them in Switzerland, would have left most people in the debt-ridden country perplexed. It is a year since Greece signed a deal with the European Union and the International Monetary Fund to receive a 110-billion-euro bailout to prevent bankruptcy. That agreement came with strict terms and over the last 12 months the government in Athens has imposed the kind of austerity measures that make it difficult for Greeks to imagine that some of their countrymen might have enough spare cash to deposit in Swiss bank accounts.

One of the key features of the loan agreement has been repeated tax increases. Value added tax (VAT) has gone up several times since last year, income tax has been adjusted, duties on alcohol, fuel and tobacco products have been hiked and the tax on pensions has been increased. As a result, Greece now has the third-highest VAT rate in the EU, the second-highest duty on petrol and the third-highest social security contributions in the 27-nation bloc.

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Painting by numbers

Illustration by Manos Symeonakis

 

Thessaloniki – Legend has it that Thessaloniki’s White Tower got its name after a prisoner held within its walls whitewashed the 27-meter tall structure so he could receive his ticket to freedom. For Prime Minister George Papandreou, who failed to impress in the northern city last weekend with a flat economic policy speech and an unconvincing display at a marathon news conference, there was no such hope of liberation from the shackles that bind his government.

On Sunday, whether it was the locals lounging in the cafes at Aristotelous Square, the protesting firefighters marching toward the Thessaloniki International Fair, or the police officers –as ever looking like bored guests at a relative’s wedding – guarding the Makedonia Palace Hotel where the Cabinet had decamped to for the weekend, nobody seemed particularly bothered by what Papandreou had to say.

His appearance simply confirmed what Greeks already knew: tough situation, tough choices, and tough times ahead. But almost a year after PASOK came to power and some six months after it agreed with the European Union and the International Monetary Fund on a strict plan to tackle its debt crisis, people were entitled to hear something more substantial about where the country will go from here, something to give them hope that a course has been plotted through this economic maelstrom.

Papandreou’s only real note of optimism was in a section of his speech dedicated to Greek entrepreneurs and businesses excelling internationally – proof, the prime minister suggested, that the desire and ability to succeed is strong. Yet, even this attempt to lift the mood rang slightly hollow: one of the companies Papandreou mentioned was a start-up that created iSteam, an iPhone application downloaded by more than 3 million users, but on Tuesday a young entrepreneur involved in the project revealed the firm had been founded in the UK because of the excessive red tape in Greece.

The fact these creative minds were put off by the business environment here says more about Greek reality than the thousands of words in Papandreou’s speech. In fact, there was no indication in what the prime minister said that his government has plans to create a more conducive atmosphere for business, nor an acknowledgment that the terms of the EU-IMF agreement are stifling economic activity. If structural reform, civil service pay cuts, pension reductions, higher taxes and the slashing of public spending are all ingredients of the nasty, but necessary, medicine that Greece has to take, then there has been no move by the government to concoct a potion to combat the ugly side-effects such as negative growth, unemployment, dwindling consumer spending, poor business sentiment and inflation.

All that Papandreou proposed in Thessaloniki was a reduction in tax on reinvested profits and the fast-tracking of foreign investment programs. Both are welcome moves but collectively they fall short of what’s required. It’s hardly the formula to dislodge Greece from 83^rd place on the World Economic Forum’s Global Competitiveness Index, which was published last week. Ranked last in the EU and nestled uncomfortably between El Salvador and Trinidad and Tobago, it will take more than a few common sense measures to thrust Greece onward and upward.

There has been no convincing attempt by PASOK to discover the missing link between structural reforms and the measures needed to stimulate the economy. Instead, Greece faces the prospect of slipping into a vicious circle where a lack of growth would prompt a steady stream of fresh austerity measures to make up for revenue shortfalls. In this scenario, Greece’s fiscal position would steadily worsen and, like a dog chasing its tail, the government would be sniffing out funds just to service its debt and for nothing else. Ultimately, Greece’s credibility on the international financial markets would disintegrate and the whole purpose of entering the EU-IMF fiscal agreement would be defeated.

Trying to get the balance right between fiscal adjustment and growth is an unenviable task and the only saving grace for Papandreou and his government is that they’re not the only ones who don’t have convincing solutions. The opposition parties, for instance, have been heavy on the criticism of the belt-tightening but light on counter-proposals. Foreign experts, meanwhile, are offering suggestions that Greece cannot contemplate politically, such as debt restructuring, default or exit from the eurozone.

The UK is facing a watered-down version of Greece’s problem and critics there have begun challenging the Coalition Government’s drastic deficit reduction strategy. Recently, Ed Balls, a longtime economic advisor to former Labour Prime Minister Gordon Brown, warned in a speech at the Bloomberg financial news service that Osborne’s hefty spending cuts would send Britain into double-dip recession and cause long-term damage. He singled out Greece as an example not to follow, arguing that the spending cuts are undeliverable and that a lack of growth will eventually lead to the markets losing confidence.

“The Greek crisis may have started with concerns over the government’s ability to service its debt but it is now a more fundamental question about whether its economy can grow and its society can remain stable,” said Balls. However he has few useful proposals for Greece. Balls suggests less stringent cuts, spread out over a longer period of time – a luxury not available to Papandreou’s government – and support for a series of programs aimed at boosting employment.

It’s hardly a groundbreaking idea but some kind of apprentice scheme for high school graduates, whereby firms are given financial incentives to take on teenagers would at least be a place for PASOK to start. Papandreou had once been in favor of allowing firms to be excused from paying social security contributions for young hires for a certain period. He might want to reconsider this idea, even though it would be anathema to the left wing of his party, as it would put spending money in the pockets of thousands of teenagers while helping emerging businesses limit their costs. But bolder ideas will be needed. Perhaps the government needs to put the billions spent on feeding, training, housing and transporting Greek youths who have no interest in doing their military service to better use. Why not offer them the opportunity to do community work and spend a fraction of the money on paying them a small wage instead?

However, all this is minor tinkering when major interventions are needed; interventions that will help drive Greek companies forward, that will boost the tourism sector, that will support innovation and that will strip away the bureaucracy which limits entrepreneurship. Greece has been a global economic test case this year and if it manages to find a way to balance drastic fiscal adjustment with economic revival new ground will be broken. Making this happen within the current constraints is an order of massive proportions but that’s what the prisoner must have felt like when, bucket and paintbrush in hand, he stared up at the White Tower. Nevertheless, the job got done and the chains were broken. Maybe there is a positive message to take from Thessaloniki after all.

This commentary was written by Nick Malkoutzis and was published in Athens Plus on September 17, 2010.

Crisis? What Crisis?

Illustration by Manos Symeonakis

I’d heard it said many times, in many ways but never with such clarity. It fell to Thanassis, an advertising company employee vacationing on Serifos to deliver a wonderfully succinct assessment of the country’s mood. “Everybody is waiting for September without knowing whether it will be a new beginning, or the beginning of the end,” Thanassis, who clearly has a flair for dramatic turns of phrase, told Agence France-Presse. All his experience as an advertising executive didn’t prevent him from not only jumping on this particular bandwagon but riding it all the way into the imaginary Doomsday sunset like a champion jockey.

September is no longer just any month in most Greeks’ minds, it’s a mystical watershed, a moment in time when clocks will stop, spoons will bend and fish will jump out of the sea. Spurred on by journalists and commentators who can’t resist stirring up a hornet’s nest and politicians who are desperate to be part of the madding crowd, Greeks have become obsessed about September being the month when time will catch up with Greece and lash them viciously against the rocks of hardship.

Of course there will be some tough times in September: the government will begin taking on the closed professions as it starts its liberalization program; a drop in tax revenues due to reduced household spending will require new austerity measures that could include more VAT hikes and spending cuts, and, our IMF and EU overseers will be back to check our books. But, hold on a second. Isn’t all this starting to sound a little familiar? Sure, September will bring new hardships but it’s not like January through to August has been a walk in the park. It was only a few days ago that the head of the IMF mission in Greece, Poul Thomsen, said that “Few European countries have produced so many reforms in such a short time.”

Is it possible that a quick dip in the Aegean and a couple of tequila slammers over the summer has made us forget all this? Don’t we remember how many experts predicted Greece would be bankrupt before the summer, the euro was facing imminent collapse and the EU would implode? Well, here’s some news: the euro has gained 10 percent against the dollar over the past two months, the risk premium on Spanish, Italian and Portuguese government debt has dropped and data published earlier this month showed the German economy grew by 2.2 percent in the second quarter of this year, its best performance since reunification 20 years ago. Sure, the spread on Irish bonds inched up last week and Slovakia says it won’t stump up the cash for Greece’s rescue package but it’s far from the apocalypse many dreaded.

Most bold predictions have been undone and, if anything, several months on from when the debt crisis began, the only thing we can say with any confidence is that there are more unanswered questions than when we began. It seems certain as we continue this fascinating journey into uncharted territory that September will not be a new beginning or the beginning of the end; it will be just another month in a long, hard slog as we adapt to a whole new set of parameters.

Each bump along the road will not only jolt us but it will enlighten us and, hopefully, inch Greeks closer to achieving a more stable and fairer future, free from the favoritism and myopic thinking of the past. To appreciate how the crisis has shaken things up, we only need to look at how Greece has gone from being an inert country not just gathering dust but accumulating it in huge piles, to one that finds itself at the coalface of the global economy. It used to be that reforms only existed so we could create more shelves to put them on but this year we have seen changes pushed through with breathtaking speed. Not too long ago, Greek prime ministers seemed to only venture abroad if the shopping was good but now George Papandreou is racking up more air miles than George Clooney as he seeks to preach the good word about Greece’s gallant fight with its economic demons and grab a seat at the table where the big players take decisions.

The crisis has been good for Greece. It’s created the best chance the country has of achieving catharsis and tangible change. Critics, though, will argue the process is devalued because Greece is following the instructions of foreigners. In fact, New Democracy, after almost a year in opposition, has decided this is the government’s Achilles heal. Lately, the conservatives have taken to calling Papandreou and his team “the memorandum government” in reference to the agreement Greece signed with the EU and IMF to obtain 110 billion euros in loans. Yes, it’s taken nine months to come up with this dazzling repartee. However, if the wisecrackers at ND headquarters could sew their split sides back together for a moment, they’d realize that after the flaccidness of their five years in office, it really doesn’t matter where the instructions are coming from. What counts is that the status quo, which worked in favor of the few, is being confronted. It’s natural that only outsiders could instigate this challenge since our own decision makers – some of the members of the current PASOK government included – were draughtsmen of, and shareholders in, the previous, failed system.

New Democracy, like all the political parties, is preparing for the November local elections, which are expected to be a litmus test for Greek politics. Some big name politicians want to avoid throwing themselves at the mercy of the electorate and the big parties intend to take a much more low-key role than usual, allowing local politicians to form their own alignments and groupings. The fact that rather than being drawn to power, politicians and parties are daunted by the prospect of being scrutinized or having to answer to the public is evidence of how the crisis is reordering things in Greece.

So, this September, instead of being cowed by the doom-mongers and naysayers, let’s take heart from the potential of our situation. Like so many other European countries, for Greece the next decade will be about taking steps to bring its debt and deficit under control. With that come some very harsh measures, as we already know, but, unlike other European countries, it also presents Greece with the opportunity to right wrongs, correct injustices and rebuild our dilapidated structures. That’s why we should not fear the crisis, but embrace and master it – it could be the only opportunity we have to press reset rather than the self-destruct button.

This commentary was written by Nick Malkoutzis and was published in Athens Plus on August 20, 2010.

Win or lose?

Illustration by Manos Symeonakis

When Greece lines up against Argentina at the World Cup in South Africa on Tuesday, the two sides will not appear to have much in common. Argentina, a squad packed with some of the planet’s best soccer talents, will be wondering whether it can make it to the final. Greece, a squad of ageing tryers running short of ideas, will probably be wondering what time their flight home is.

But beneath the surface, there is plenty that links these two teams. They both represent countries that have experienced economic meltdowns. Both have suffered the ignominy of being ridiculed for their handling of public finances. Both have had trouble convincing financial markets of their credibility. Both peoples have had to endure the consequences of these failures.

The similarities do not end there. Before defaulting on almost $100 billion of debt in 2001, Argentina had tied its currency to the dollar for 10 years – almost as long as Greece has been a member of the eurozone. Buenos Aires also relied on loans from the International Monetary Fund, paying a rate of 6 percent – almost as high as the one Greece is paying for its bailout package. And, despite Buenos Aires adopting austerity measures in 2001, the IMF pulled out of the South American country, triggering a default and devaluation of the peso.

“The circumstances leading to the Greek and Argentinean crises were similar – two countries with a great reputation that did not see the consequences of their excessive expansion and who counted on continued external support,” Claudio Loser, a Senior Fellow at the Inter-American Dialogue, a Washington-based forum for opinion leaders, told Athens Plus

Argentina once had an economy that was as dynamic and successful as Diego Maradona, the country’s former star midfielder who now coaches the national side. But like Maradona, who suffered from drug abuse, health issues, money problems and general erratic behaviour, the Argentinean economy hit a brick wall in 2001. Greece always craved a Maradona-like economy. The good news is that it finally got it. The bad news is that it’s the fat, wheezy and unruly Maradona, not the nimble world-beater.

So, with talk of default and exit from the single currency rife in the Athens air. Is there anything that Greece can learn from Argentina? Fernando Navajas, the chief economist and director of the Buenos Aires-based FIEL think-tank believes the best advice for Greece is to be more cohesive and organized than Argentina. “I am not saying that devaluation and default could have easily been avoided but one could have minimized the costs by some collective action on the political side coupled with a professional approach to crisis management,” he told Athens Plus. “Argentina did just the opposite on both fronts. Instead of minimizing, it maximized the cost of the crisis.”

Argentina’s disorderly retreat meant that millions of people lost their savings overnight and the value of property crashed, bringing people out onto the streets in daily protests. More than 20 people lost their lives in riots. It’s no wonder that Argentineans are cautious when they hear economists recommending that Greece leave the euro and devalue the drachma.

“Do not be fooled by a sorcerer’s apprentice that tells you the Argentinean case is a good recipe for Greece,” says Navajas. “This is particularly true in the case of magic formulas that involve asymmetric conversion from euros to drachmas in the financial sector.

“If confronted with the hard choice to abandon the euro, Greece should combine collective action and high technical capabilities to think not of an unconditional exit but rather an exit-plus-reentry program,” adds the FIEL director. “Argentina never thought about reentry and has been drifting ever since.”

Argentina used the depreciation of the peso to offset declining domestic demand by making its exports cheaper in foreign markets. It sounds like a good example to follow but Greece exports hardly anything. Also, unlike Argentina, Greece is one of 12 members of a single currency and any decision to abandon the euro would have far-reaching consequences for its eurozone partners and the European Union as a whole. Even if exit and devaluation were a viable economic option, it is almost inconceivable in political terms. This leaves debt restructuring as the only realistic option on the table.

“A process of adjustment without devaluation is possible although it may require in practice a reduction in nominal salaries and declining prices for goods and services, such as tourism,” says Loser. “A situation of adjustment without a serious look at the debt is much more difficult.”

However, even restructuring carries a very heavy economic and political cost. Argentina’s decision to default may have seemed like a simple way to get rid of an onerous load but it only helped the country switch one burden for another. Since 2001, the South American country has not been able to borrow on international markets and has been involved in a protracted process to convince its creditors to accept a loss on their investment. In 2005, three-quarters accepted a bond exchange worth a third of what they had invested. Buenos Aires is currently in negotiations with the remaining creditors and has given them until June 22 – the day Greece will play Argentina – to accept a debt securities swap.

Since its default, a number of factors have helped Argentina turn its fortunes around. Chief among which was the upturn in the world economy during the last decade. Greece, on the other hand, has to clamber out of its deep hole in the middle of a global recession. Also, Argentina’s success has come at a price – increased government spending that has been funded in part by central bank reserves and nationalized pension funds. Many economists have been scathing about this tactic, accusing the government of President Cristina Fernandez, who dismissed the rescue plan for Greece as being “condemned to fail”, of having no economic plan and burning its way through the country’s savings

“Argentina’s default and devaluation was a one-way journey without any careful planning that damaged the reputation of the country and affected its long-term growth prospects,” says Navajas. “This has been hidden by the extraordinary external conditions after the crisis, which will not be available for Greece, and which have led to confusion about the causes of recovery.”

It’s evident from Argentina’s experience that despite what some may say, default and exit from the euro are options that Greece should avoid considering. Or, at least if it does, then it should think its strategy through properly, something Greek governments do not have a very good track record of doing. Of course, there is always the possibility that, as with Argentina, its financial backers will just lose confidence in Greece and default/devaluation will not be a matter of opinion but a matter of course.

“The big message is that even with significant resources, there is a point when the rest of the world – or Europe and the IMF in Greece’s case – will not be willing to continue the support, even if they support others, such as Portugal, Spain and Ireland, because they are seen as more virtuous,” says Loser. “This is exactly what happened with Brazil and Uruguay at the time of the Argentinean crisis.”

There are clearly many things that Greece can learn from Argentina but perhaps the most useful one is that, as the national soccer team is likely to find out on Tuesday, when your back is up against the wall, there is no easy way to end up on the winning side.

This commentary was written by Nick Malkoutzis and appeared in Athens Plus on June 18, 2010.

Life, but not as we know it

Illustration by Manos Symeonakis

It’s a scene that is becoming very familiar to people across Europe: A newly elected leader addresses his nation and blames the previous government for its “total irresponsibility” which has left a “terrible legacy” of seriously compromised public finances, which are in an “even worse state than we thought” and which will require “painful” but absolutely necessary cuts. Earlier this year, it was George Papandreou delivering this stark message — British Prime Minister David Cameron reprised the role this week.

A few days earlier, the scene had been repeated in Hungary, which, like Greece, has borrowed money from the European Union and the International Monetary Fund. The claims by government officials in Budapest that the previous administration had disguised the poor state of the local economy and that the public deficit would be bigger than expected, sent the type of shockwaves across the continent and international financial markets that only Athens had been capable of until recently, as concerns about a Hungarian default stoked another round of fear about the future of the euro and the EU.

Apart from Greece, Britain and Hungary, Ireland, Spain, Portugal, France and Italy have all had to take steps – albeit less austere than the Greek ones – to rescue their public finances. Even Germany, Europe’s economic powerhouse and the metronome for stability within the Union, announced this week that it’s seeking to make more than 80 billion euros in cuts over the next few years. Until now, there has been unease about European countries being too disparate in economic terms but, ironically, the current debt crisis has suddenly given them common points of reference. It’s causing people across the continent to ask two key questions: “Why are we in this position?” and “How do we get out of it?”

There are two aspects to why so many European countries find themselves in a mess: the economic and the political. In terms of the economic failings, the EU simply found itself unprepared for the consequences of the financial crisis that began in the United States two years ago. A failure to reduce debt when European economies were booming meant that the onset of recession — which also coincided with the use of public money to prop up the private sector, especially banks — has saddled many countries with unprecedented debt and exposed an Achilles’ heel that speculators can exploit.

“The banking crisis has mutated into a sovereign debt crisis; the weakest members of the eurozone are targeted because the euro is a comparatively new currency lacking sufficiently strong institutional foundations, and because markets doubt the ability of the weaker countries to manage their debt problems,” the editorial director or the European Council on Foreign Relations, Thomas Klau, told Athens Plus.

This implies that the real roots of the crisis lie in the political arena. Just as governments across Europe have tried to mask the real size of the problem, often leaving it for the next administration to deal with, so for a number of years, the politicians of various ideological persuasions that held power found it easier to go with the flow rather than develop a long-term plan. Instead of making hay while the sun shone, they simply sat back and soaked up the rays. What happened in Greece, more than anywhere else, has driven this point home. “Greece stands as a warning of what happens to countries that lose their credibility or whose governments pretend that difficult decisions can somehow be avoided,” Cameron said this week.

There are few who would argue with him. “I think that the political inadequacies are most pronounced in the Greek case and to a lesser extent in Portugal,” Professor Iain Begg of the European Institute at the London School of Economics told Athens Plus. “In the other cases, it is more that – as with banks like Northern Rock or Lehman Brothers – the business model is no longer as viable as it used to be and that has fueled market scepticism. Let’s not forget that Spain actually scored pretty well in relation to the fiscal rules, even if, with hindsight, we can now say that it ought to have been running a budget surplus.”

These inadequacies, which an unnamed German official described to the International Herald Tribune’s John Vinocur as “a decade wasted through a lack of frankness and realism,” have left many European countries, the single currency and millions of people at the mercy of markets, which have now become the sole judges of economic policy. The response to this situation, therefore, must be one that is deeply political and carries serious conviction. “Because EU members were caught misrepresenting their finances with the passive acceptance of France and Germany for a decade, no response or solution that is based on a statement of intention rather than a legally binding undertaking is likely to lead the markets away from their hair-trigger surveillance of the euro and Europe’s solidity,” wrote Vinocur in the IHT this week.

The political solution to this problem must first come at an individual state level. “In the UK, the problem, I suspect will prove to be reasonably easy to manage but in Greece, the whole approach to the public sector needs radical change,” says Begg. “In Spain and Italy, labor market and welfare reforms will require political courage and leadership.”

This decisiveness then has to be replicated on a collective level as well. The IMF said as much in its report on the European debt crisis this week. “Crisis management is not an alternative to corrective policy actions and fundamental reforms needed to reinforce the foundation of the European Monetary Union,” the Washington-based fund said in the wake of European finance ministers agreeing to commit 440 billion euros to a rescue fund for debt-ridden EU members, which the IMF will also participate in.

In practical terms, it means that common policies and instruments must be devised along with checks that it is in everyone’s interest to adhere to. “What this crisis has shown is that the euro countries must accept a much stronger degree of shared sovereignty over their public finances and economic policy to ensure the long-term survival of their currency,” says Klau. “A monetary union needs a political union, as the Bundesbank wrote 20 years ago.”

Instilling this level of togetherness is going to be a massive challenge. If controling their debt in the midst of a recession appears an elusive goal for EU countries, then getting them to work in harmony toward this will seem like trying to pin down a greased greyhound during a torrential rainstorm. Already this week, Britain has rejected the notion of presenting its national budget to Brussels before submitting it to its own Parliament. The newness of the debt crisis means that political leadership and consensus will take some time to emerge but recent history indicates our futures depend on it eventually shining through.

“The decisions we make will affect every single person in our country, and the effects of these decisions will stay with us for years and decades to come,” Cameron told his audience this week as his government began reviewing its planned spending cuts. “How we deal with these things will affect our economy, our society, indeed our whole way of life,” he added. The Conservative Party leader will probably never utter more accurate words during his premiership. In fact, our way of life is already being transformed. What it changes into will depend on the political decisions taken over the next few months.

This commentary was written by Nick Malkoutzis and appeared in Athens Plus on June 11.