Things are very serious in Brussels today and yet. Until we got there, the coming and going of the European leaders and the other decision makers of the Greek crisis drama were bearing features of a tragicomedy. The following article was written a couple of days ago by Polyvios Petropoulos, economics professor. He notes at the end of the article: ” The decisions of EU leaders which were announced today, a few minutes ago (in the afternoon of July 21, 2011), are in the right direction, but more detailed elaboration and quicker implementation is needed.”
THE TRAGICOMEDY OF EUROPE AND THE GREEK CRISIS
The leadership deficit, the indecision, the muddled thinking and the resulting cacophony of European leaders is now well established beyond any doubt, and I need not dwell upon this any further. But I would like to apply some simple, good-old Aristotelian logic to some of the EZ debt issues, which, although the way to resolve them seems to me to be rather obvious and self-evident, apparently they are not widely understood, especially at the EU leadership level.
First and foremost, the European leaders must make up their minds, agree and decide what kind of Europe they want. Do they want a true “European union”, as the name implies, and as the visionary founders envisaged, or just a “common market” (i.e. a free-trade area)? An entirely different course of action will be required in each case, as I will propose below. And there is nothing in between these two options that would be workable.
But, of course, before they can decide on anything, they need a decision mechanism (or decision-making process), which they do not currently have, but one with democratic legitimacy. The current Franco-German decision-making lacks legitimacy, and the unanimity requirement among 17 or 27 member states is clearly unworkable. So there is a practical and political vacuum here that must be filled, which is a sine qua non for deciding and/or doing anything at all.
Now, if what they want is a European union, as the “optimum currency area” discussion has firmly established in the economics literature for over a decade and until recently, this will require, in addition to the monetary union, as a necessary condition, a fiscal union, economic governance and eventually a political union. I realize of course that this will be difficult for many obvious reasons, which have been amply discussed, and that it would take a long time to accomplish. Nevertheless, a goal (even a long-term one) is needed to guide the current day-to-day decision making, which must be in accordance with the long-term goal. And public opinion must be prepared and shaped accordingly. True leaders should guide the people, without succumbing to their populist inclinations.
And, if this is their final aim or goal, it follows that this must necessarily involve solidarity, i.e. things like Eurobonds, debt-reduction or forgiveness schemes, a kind of European “Marshall Plan”, new special-crisis EU structural and cohesion funds (with no national participation requirement) for growth-enhancing investment projects, buy-back plans to be financed by EZ institutions, bond swaps or exchanges, lower-interest and longer-maturity true bail-outs, strong support to Greek and EZ banks etc. etc., which are currently being discussed and analyzed by economists and commentators, and I need not go into greater detail here.
And (this is addressed primarily to certain German economists and officials), yes gentlemen, a union is par excellence and by definition a “transfer union” (with reasonable conditionality), and there is no “moral hazard” involved in that, but rather a “moral deficit” in the lack of one. And the Maastricht Treaty does allow bailouts “under special circumstances”. Please read the Treaty carefully. And don’t forget (a) how Germany and the rest of Europe were bailed out with the Marshall Plan after WWII, and (b) the pending war reparations to Greece, which are equivalent to the entire Greek debt.
On the other hand, if what the European leaders want is just a common market, or free-trade area, then of course an entirely different set of policies are warranted both on the part of the EU and the weaker peripheral states. In a moment of crisis, each state is bound to look after its own interests. The core Europeans must protect their banks and the common currency, as they have been doing so far, while Greece and the other GIIPS (please let’s be decent and leave PIGS and PIIGS to the …pigs) must try to soften the blow. Each one will be on his own…and God help Europe.
In the very beginning of this crisis, according to the European (mainly German) pseudo-elite and most pundits, this crisis was supposedly only a problem of the “profligate”, “lazy” and “corrupt” Greeks, who should be punished and be asked to offer the Acropolis and some of the Greek islands to pay for the debt…On May 18, 2010 I wrote this article to debunk this malicious nonsense. And on May 5, 2011, I wrote this article to deal with more recent truths and myths on the subject (it can also be found here, or here under the pseudonym pkpetro).
Greece is now being given a deadly medicine, which is killing the patient. Despite the stupid and inhuman fiscal measures imposed on the population, against which they are already revolting with unforeseeable consequences, the deficit has increased by 28% in the first semester of 2011 compared to the corresponding period of last year. GDP has fallen by 8.5% since early 2010. And the debt to GDP ratio will be skyrocketing continuously with no stabilization in sight. According to my most optimistic estimates, a 7-8% of GDP primary surplus will be required annually in order to stabilize the debt/GDP ratio by 2020. (Greece currently has a 4% deficit.)
M. Burke has estimated (here) that Greece must attain a primary surplus of 21% (!) for its debt to be sustainable. Z. Darvas (of the Bruegel think tank) has estimated in his paper “Debt Restructuring in the Euro Area” (here) that, in order for Greece to bring down the debt/GDP ratio to 60% by 2034, a 6.3 percent of GDP persistent primary surplus is needed in every year starting in 2015 in the optimistic scenario, and a 9.5%…in the cautious scenario”. The country is clearly insolvent and, as long as its total interest payments rise at a faster rate than its GDP growth (which will be so for the foreseeable future), its debt burden will continue to rise and will be unsustainable. Is there anybody out there who honestly thinks otherwise? If so, please come forward with the proof of your assertion.
The privatization fire-sale program is a farce. Does anyone is his right mind believe that Greece can sell or privatize 23 assets in 5 months (or 1 per week), at a time when prices of Greek assets have hit bottom, and no one wants to invest in Greece? The Greek state sold 10% of OTE to Deutsche Telekom a few days ago (as was obliged to do by their initial contract with them) for 8 euros per share, when some time ago the price at the ASE was 24 euros. 99.8% of Greek Defence Systems is to be sold. What if Turkey is the highest bidder? State monopolies of public goods (e.g. water etc.) are to be sold to the highest bidding private monopolist, who can then charge the Greek people as much as he wants for water etc. Naturally I have no objection to selling other public companies, such as casinos etc. (which should not have been public in the first place) or real estate, but a longer time is required.
Mr Poul Thomsen (the IMF official responsible for Greece) in his recent press conference on July 15, 2011 (here) insists that “the program needs to be fair and protect the most vulnerable groups of society”!!! Unfortunately, the program Mr Thomsen and the rest of the Troika imposed on the Greek people is exactly the opposite. I have written to the Greek minister of finance E. Venizelos, who has made similar claims, mentioning 12 different measures, which decimate the income and purchasing power of the lowest-income retirees (people receiving pensions of 500-700 euros per month). Does Mr Thomsen want me to translate it and send it to him? I doubt it, because he knows all of these measures very well.
Two recent IMF papers (here) and (here) establish evidence that “fiscal consolidation has contractionary effects” and that “proposed consolidations may prove to be stronger than acceptable, especially if somewhat larger than anticipated fiscal multipliers lead to a sizeable economic deceleration”. The writers are kindly requested to inform their colleague Mr Thomsen…
What then should Greece do, if the “troika” does not change course, and the EU leaders do not know the meaning of the word “solidarity”? It’s all detailed in my two articles/posts mentioned above. Greece should first balance its primary budget, and then restructure its debt, remaining inside the EZ, or exiting the euro, if needed, with EZ collaboration or without. And Greece must make the structural reforms needed to improve competitiveness (which however is not only or primarily a function of low wages, as some people believe), aim at export-led growth, and capitalize on its comparative advantages. Recent information shows that Greece has immense deposits of oil (in the Aegean and Ionian Sea) and natural gas (1.5 trillion cubic meters south of Crete), as well as gold in Northern Greece. Greece (according to the FT, “Greek Go-ahead for European Goldfields, July 8, 2011 here ) “is poised to become one of Europe’s largest gold producers”.
