Greece and Eurozone Crisis – What The Germans Don’t Tell Us.

Stelios works as a waiter in small resort on the south coast of Crete. At the end of the season he has plenty of time to use his excellent English with tourists – like ourselves. We explain that we have visited many parts of Greece, having spent holidays there every year since 1983, and witnessed its rise from a Balkan peasant economy to a deceptively prosperous European state and its subsequent decline to a Eurozone basket case.

Stelios listens carefully as we relate how it good it has been to witness, for example, the provision of local health centres by past PASOK governments, but then breaks in: “yes, this was good of course, but listen: our village has 600 people, but a health centre built for a population of 2000. It is full of the most modern equipment, mostly unused, all made by Siemens. In Germany.”

This brief snapshot picks out two of the three major issues behind the Greek crisis. The first is the lack of public service discipline in the country’s economy. As PASOK under Andreas Papandreou sought to transform a peasant state economy into a bourgeois economy in less than a single generation through the means of public expenditure, waste and corruption became endemic. The result was like watering a desiccated pot plant – what went in at the top poured straight out at the bottom with little sustainable benefit in between.

The second issue is just as important but less obvious: the way in which Euro membership has benefited Germany and will continue to do so. At the currency’s foundation, Germany was still suffering from its choice to reunify two contrasting economies (against the advice of the Social Democratic SPD  incidentally) which had resulted in extreme social stress and mass unemployment, especially in the former DDR.

The Euro was important to Germany’s recovery in two ways. Most obviously, it removed currency fluctuation and conversion as frictional factors from its export performance within much of Europe’s single market. But more importantly, it secured German goods on wider world market to a currency with a more stable and ultimately lower value than the old Deutschmark.  

Put simply, German goods were and are cheaper in large markets (notably the USA and the UK) and in growing markets like the BRIC countries because the Euro is weakened by Greece (and Ireland, Spain and Portugal.) In this way, it is arguable that Germany has very smartly outsourced economic failure to, and grown its domestic economy at the expense of, its Eurozone partners.

At same time, it also worth looking at the various causes of the weaknesses of those partner economies. Greece’s main problem is its unreformed economic and governmental  systems which have led to unrestrained overspending.  However, Spain and Ireland‘s problems have been caused by the cheap credit created by the guarantee of the Euro having driven massive property price bubbles. Most recently, the version of the crisis running in Cyprus has at its root in an inflated (and partially corrupt) banking sector.

In other words, there are different causes for crises in different countries. This is obvious, it seems , to everyone except those responsible for sorting out the mess that is the Eurozone, that is the Troika which seems to recommend the panacea of austerity alone. The proof of the folly of this approach is shown by the varying outcomes so far of the policy in different countries. On the one hand, Spain has paid a huge cost (50% youth unemployment and house price fall of up to 40%) but has been successful in raising business competitiveness  and has raised exports to a three-decade high.

In contrast, Greece has taken the same medicine, and shared the human cost (again to 50% youth unemployment, plus associated rises in crime and support for political extremism) but its economy has deteriorated still further. Three Greek economists (Costas Meghir, Dimitri Vayanos, Nikos Vettis[1]) point out that Greek debt has risen since from 129% in 2009 to 189%, despite restructuring of private debt and drastic austerity measures.  They describe that although the government’s primary deficit has been all but eliminated “… on its current course, Greece is headed for disaster: further declines in GDP, a possible chaotic default on its debt, extremist political parties in power, and isolation from Europe.” In the case of Greece, the medicine looks very much like snake-oil.

Their proposed solution is practical, simple and radical. The simple and practical part is that the Greek problem should be seen for what it is and addressed accordingly. The root cause is an unreformed institutional framework which resulted in corruption and waste, so these should be the focus of any solutions, including linking a 50% write off of Greece’s debt to institutional reforms. These could include improved efficiency in tax collection, public administration and acceleration of judicial processes, plus reduction of corruption and other white-collar crime. All these can be measured through the known methodologies of bodies such as the World Bank and IMF.

In this way, the symptoms of the crisis (debt) can be addressed at the same time as its cause (the unreformed institutions); the outcome would be to create growth, which is the only way to break the current tailspin of debt and despair.

The authors themselves do not allude to the radical part of their plan. This is that the actions of the Troika in Greece and its equivalents elsewhere have not only been dogmatic in their application of austerity as a panacea, but have been inflicted without the consent of those affected. This has led to widespread disillusion with the conventional political process, including the re-emergence of the fascist New Dawn movement in Greece. It has also denied local political inputs which might lead ultimately to more successful outcomes.

The growth of the Syriza as a new movement on the left is more encouraging, apparently presenting a departure from the Stalinist/Euro-Com clichés as well as from the tribalism, nepotism and cronyism of PASOK.  In fact, the movement away from the former mainstream parties possibly represents a surprisingly articulate and intelligent political and economic response.

On the political side, this is simply that the Greek people should have a democratic voice in the future of their country; on the economic side, they believe that it will be beneficial for Greece to stay in the Euro, but not on the terms offered. In fact, Syriza seems in these respects to be more social democrat than far-left. In addition, their approach suggests that they believe that this will also remain beneficial for the Eurozone (especially Germany), which needs Greece as much as Greece needs the Euro.

 

And they could be right, if the answer lies in those Greek (and Portuguese and Spanish) health centres and the market and economic relationships which they represent. Common sense suggests that Germans must grasp that to keep Eurozone in good condition is in their interest, not only for peace or goodwill reasons, but to maintain and grow its own prosperity.

And just as Syriza was able to make significant advances in putting the Greek case in last year’s Greek elections, there will be the opportunity for Germany’s politicians to put the case for Germany to promote a more stable, prosperous and democratic Europe in its own interest when they go the polls later this year.

It is likely that the cost of a chaotic Greek exit would cost the Eurozone including Germany at least as dearly than relaxation of the current bail-out terms. It will also be incumbent on the Social Democrats to counsel and present to their electorate not only a social Germany, but also a social Europe which offers support to working people within the Eurozone. It will be interesting to see whether Angela Merkel is able to offer the same through the Christian Democrats, albeit as a good business case rather than on grounds of solidarity.

The alternative to such a Europe would be very grim indeed. To return to the south coast of Crete, and another taverna, whose owner Vangeli  told us in June 2011 that he was not worried, as “business is like the sea, it goes up and down” By September 2012, he was deeply worried, as no upturn had happened: fewer customers and rising costs had largely eroded business confidence in one of the country’s strongest sectors.

The first two issues arising from Vangeli’s nearby colleague Stelios were Greece’s underperformance as a Eurozone member and the export advantages Germany has accrued from the common currency. The third issue is that although employed as a waiter, Stelios’s excellent English came from having gained an accountancy degree at a UK university, and he had recently been made redundant from his government post as part of the latest austerity package.

He had been a tax collector.

 

Comments welcome.

(Thanks to Eamon Fitzgerald for some technical advice. All views and any errors are mine alone.)


[1] Stop the Cuts and Fund the Reforms, C. Meghir, D. Vayanos, N. Vettas (Greek Public Policy Forum 2012) http://www.greekpublicpolicyforum.org/2012/11/stop-the-cuts-and-fund-the-reforms-meghir-vayanos-vettas/

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