Tag Archives: Greece debt crisis

Et tu, Obama?

Illustration by Manos Symeonakis

Having seen the caliber of some of the Republican Party’s presidential candidates, it’s hard not to want with every fiber in your body for Barack Obama to succeed during his first term in the White House. But this week, thanks to the comments he made aboutGreeceafter meeting German Chancellor Angela Merkel, it was difficult not to feel respect for the American leader slipping away.

The headlines after the two politicians held their news conference inWashingtonrevolved around Obama and Merkel’s warning that the Greek debt crisis could bring the world economy to its knees if it’s not tackled properly. “America’s economic growth depends on a sensible resolution of this issue,” said Obama. “It would be disastrous for us to see an uncontrolled spiral and default inEuropebecause that could trigger a whole range of other events.”

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Is Greece drowning in Europe’s fruit salad?

Illustration by Manos Symeonakis

“Europe is like a fruit salad,” says Frank Schwalba-Hoth, perched on the edge of his seat at the European Parliament’s cafe in Brussels. Normally, our surroundings would be a hive of activity but this week the MEPs have buzzed off to Strasbourg, the Parliament’s other home. But even if there had been a throng of politicians from the 27 member states around, the topic of discussion — Will Greece survive? Will the EU survive? — would have been too absorbing for us to notice.

Schwalba-Hoth, a German politician who was a founding member of the country’s Green Party and served as an MEP in the 1980s, is engaging company. He now works as a networker and consultant in Brussels and his knowledge of the workings and history of Europe’s institutions is unrivaled. He believes the Greek debt crisis and the threat it poses to the euro is just the latest in a long list of challenges that the EU, which traces its roots back to the European Coal and Steel Community founded in 1951, has faced in its long history.

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The wrong battle

Illustration in linocut by Manos Symeonakis

“There is no Greek-German war,” government spokesman Giorgos Petalotis said last week. “Greece and Germany are not on collision course,” said Foreign Minister Dimitris Droutsas. All these statements can only mean one thing: Greece and Germany are very much at loggerheads. But their dispute is not just a bilateral squabble; at its heart it’s about divergent views on how to respond to the crisis threatening the euro and, beyond that, on the very purpose of the European Union.

The frantic attempts by the government to play down any rift between Athens and Berlin came after Greek Prime Minister George Papandreou decided on November 15 to dust himself off, stand on the ruins of the Greek economy and hit back at German Chancellor Angela Merkel with a rebellious passion. Speaking in Paris, Papandreou accused Merkel of driving up bond yields for weaker eurozone members by insisting that private investors should foot part of the bill for a permanent mechanism to support countries with failing economies, like Greece’s. “This could create a self-fulfilling prophecy,” said Papandreou. “This could break backs, this could force some economies into bankruptcy.”

On the face of it, there seems little wrong with Merkel’s insistence that private bondholders should accept losses, or a “haircut,” on their investment as part of a debt crisis mechanism to be adopted by 2013. Most Europeans would accept that this would create a fairer system although, clearly, German taxpayers would benefit the most as they’re the ones who would be called on more often to bail out failing eurozone members. But the self-serving element to Merkel’s position is not what should be of most concern to Europeans. Instead, it’s the way Berlin has tried to steamroller other EU countries into accepting the inclusion of the “haircut” clause ahead of a decisive EU leaders summit in Brussels next month. It’s this lack of consultation and the absence of consideration for struggling eurozone members that is undermining the Union.

Papandreou argued that making such a big fuss about investors having to pay their share simply gave jumpy bondholders a seriously aggravated case of the jitters, pushing up the yields on government bonds for Ireland, Portugal and Spain to dangerous levels. Few EU leaders backed Papandreou openly but there is great concern about Germany’s stubbornness. “When the history of the eurozone is written, last month’s German-driven EU summit agreement to devise a crisis resolution mechanism for countries to service their debts may well be cited as the event that pushed Ireland over a cliff,” Bloxham, Ireland’s oldest stocbrockers, said last week, a few days before Dublin turned to the EU and the International Monetary Fund for emergency loans.

In Germany, though, there is a different view. “If Merkel were to abandon her plans, then it would be paradise for investors and weak governments,” wrote the Suddeutsche Zeitung newspaper last week. “The speculators could charge higher interests on Irish or Greek bonds without any risk of losses. And the Greeks could continue with their record indebtedness because they would have no more pressure from the financial markets and in an emergency would be rescued by their euro partners.” However, this ignores that when Greece tries to go back to the international bond markets in 2013, its borrowing costs will be pushed up anyway, as investors will be wary of having to take a haircut should Athens have to revert to the permanent EU mechanism for further loans.

The Greco-German dispute is symptomatic of the differing views emerging within the EU about how to combat the debt crisis. There is a tendency for the EU to speak with two voices and to pull in two different directions. “The euro, which was supposed to make European integration irreversible, could become its undertaker,” wrote the Frankfurter Allgemeine Zeitung daily last week. Every day the debt crisis gnaws away at the EU’s confidence, making the Union seem an exhausted shadow of its former sprightly self. This dissipation of energy and will is leading to division and, whether through bad luck or design, Merkel is at the forefront of creating ever-deeper rifts.

Speaking at a rally of her Christian Democratic Union (CDU) in Karlsruhe on November 15, the same day that Papandreou challenged her scheme for private investors, Merkel said her predecessor as chancellor, Social Democrat Gerhard Schroeder and his Finance Minister Hans Eichel had blundered when they allowed Greece to join the eurozone. “In 2000, Schroeder and Eichel couldn’t let Greece join the euro fast enough and they ignored all the warnings,” she said. “It was a political decision… political decisions are important but those which ignore the facts are irresponsible.”

It’s now obvious that Greece was not ready in 2000 to stick to the single currency’s fiscal guidelines, as prescribed by Germany. It’s also clear that allowing Greece into the eurozone was a political decision — one aimed at giving the nascent single currency numerical, if not necessarily economic strength, but also the opportunity to encourage economic reform and German-style efficiency in a sluggish European state. A decade ago, it was a convenient political decision for Germany — Greece, after all, became another market in the eurozone for its exports — but now it’s a terrible inconvenience for Berlin. But that’s the thing about political decisions: You take a risk. Sometimes you ignore the facts because you have a conviction that something greater is at stake, even if the numbers don’t back you up.

Merkel might consider, for instance, that the Marshall Plan, which ensured Germany’s post-war reconstruction and helped it become the economic powerhouse it is today, was a political decision. The United States, which led the effort, could have decided that paying to help rebuild Germany did not make economic sense but Washington chose to look at the bigger picture — the opportunity to fight “hunger, poverty, desperation and chaos” as US Secretary of State George C. Marshall said when he unveiled his plan in June 1947. Using words that are eerily relevant to today’s Europe, Marshall said: “The United States should do whatever it is able to do to assist in the return of normal economic health in the world, without which there can be no political stability and no assured peace.” Peace in Europe is not under threat in 2010 but the EU’s faltering economic health is putting its unity at risk.

While leaders argue over bond yields, haircuts, bailouts, deficit and debt, one very important factor is being overlooked. As was the case in the Europe of 1947 before the Marshall Plan, it’s the people that are suffering. They are the ones that pay the cost of failed economic policies and soaring bond yields — people who have fulfilled the wishes of politicians and bankers by mortgaging their futures to buy houses and cars and who believed the euro would bring the permanent stability they were promised. This is why unity must be restored.

Somewhere between Papandreou’s rebelliousness and Merkel’s intransigence, we’ve forgotten that the EU and its institutions were created to improve people’s lives. Many of these people are now losing their jobs, homes and hope. That’s why, even though Greece and Germany may not be at war, their dispute is confirmation that Europe is fighting battle, but the wrong one.

This commentary was written by Nick Malkoutzis and was published in Athens Plus on November 26, 2010.

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 83rd 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.