Thursday, 22 September 2011

The Stubborn Greek Leviathan

Greek Prime Minister George Papandreou has faced a dilemma these past two years - whether to squeeze more money out of the pockets of the struggling middle class, or alienate political allies by cutting state sector jobs. Over the last ten days he has done both under pressure from creditors, in a bid to raise or save a total of 8bn euros this year (See sidebar at the end of this post). The fact that the projected revenue shortfall for 2011 is a quarter of that sum shows how little credibility we enjoy.

Greece's creditors may demand cost cuts in government rather than squeezing more from taxpayers, but those trigger sedition in the ruling Pasok party's union power base. That is the reason successive governments have not pruned but fertilised the state payroll, which stood at over a million of Greece's 4.5 million-strong workforce when Pasok came to power in 2009. (Cabinet member Ilias Mosialos recently told a Sunday newspaper that 200,000 have since gone off payroll but cited no source for the figure).

The bankruptcy scenario thus still hangs over Greece. Fitch's said today that it expects a Greek default within the euro. It was the latest in a crescendo of voices from economists and financiers calling what they see as the inevitable. Some also see it as the beginning of the end of the euro.

Greek reactions during this  ten-day period of government oscillation have been unvaryingly critical of both savings and revenue raising measures. The communist party has discouraged civil disobedience on the property tax. "Refusing to pay is a legal act for families that do not have the means, but also an obligation and an act of solidarity for those families still holding on." (Whether property ought to be owned at all is left unaddressed).

Opposition New Democracy's position is more nuanced. "I do not tell people not to pay," said opposition leader Antonis Samaras at the Thessaloniki International Fair on September 18. "I say people cannot pay." Like Papandreou prior ro his October 2009 election victory, Samaras is spinning a populist myth. Back then, Papandreou had told voters that the credit crunch was a fabrication. Samaras is telling them that he can renegotiate the memorandum that obliges Greece to undergo painful reforms. We've already been there. Both Venizelos and his predecessor, George Papakonstantinou, were thrown out of meetings with eurozone ministers after attempts to renegotiate their position. Papandreou tried and failed to set the agenda for European fiscal union. Both Berlin and the ECB have flatly refused to issue eurobonds for Greece's sake, or anyone else's. In any case, the process is technically difficult, requiring new treaties with all 17 eurozone members. Popular opposition to bailing out the Greeks as much as it has done is pushing Angela Merkel's coalition over a cliff. Germany's constitutional court has now barred her from extending further credit without the prior approval of the Bundestag's budget office.

Samaras is right on a couple of points. The privatisation programme, which is a 28bn euro chunk of Greece's second bailout plan, is looking increasingly undermined by the plummeting value of real estate and the Athens stock market. And the government's inability to release the creative energies of the private sector by unshackling enterprise from the constraints of bureaucracy means its revenue policy has been confined to taxing the economy to death. As a result, it has speeded and deepened the recession. The economy will shrink by 5.3 percent of GDP this year by the government's own confession, compared to 4.5 percent least year and four percent the year before. That in turn further shrinks tax revenues and prompts measures that further the death spiral.

But ultimately Samaras has done more harm than good. His refusal to join forces with Papandreou has deprived Greece of the political leverage in Europe both socialists and conservatives so badly want. And his partisan stance has given people false hope that Greece can somehow talk its way out of repaying its debt, either through default or through renegotiation of the July 21 memorandum of reforms, and still retain its creditworthiness. His own scheme for reviving the economy, termed Zappeion 2, is a bundle of populist concessions (legalisation of all illegal homes, zero dismissals from the public sector) and currently unaffordable pump-priming (e.g. overnight state repayment of its debts to small businesses).

Samaras is also out of line in threatening that in the event of an election his party would only agree to rule with an outright majority, even if it took two elections to achieve it. The constitution would oblige Samaras to seek a coalition partner if he only won a relative majority. He is blackmailing an angry and divided electorate. But once again, Papandreou did the same. In spring of 2009 he announced that his party would trigger an election by refusing to renew the president's mandate in parliament, which requires a bipartisan majority.

The sins of New Democracy and Pasok are sins both of weak character and cynical manipulation of democracy. Worst of all, they have both committed the cardinal sin of  buying bloc votes from the unions and defenestrating meritocracy for three decades. Their inability now to cut down the monstrosity of the public sector is hardly surprising. It is like asking termites to demolish their own mound.

Excuses can, of course, be made. The collapse of financial markets and the defencelessness of the euro are beyond Greece's jurisdiction. Both Lawrence Summers and George Soros recently pointed out that Europe’s weakness is its consensual, incremental policymaking that is never quite enough to achieve the quantum leap markets require. As a result, markets are pitchforking politicians into action, and the result, they say, will be the euro's eventual collapse.

But once those excuses have been made, the blame for the fact that the Greek crisis has worsened over two years ultimately rests with George Papandreou's government and to a lesser extent with the opposition. He has caused much of the political unrest by taxing the easy money in consumption, salaries and pensions. And he has done this to avoid the political pain of cost cuts, further undermining market faith in the Greek bond in the process.

Former finance minister Stephanos Manos (1990-93), suggested in a Kathimerini Op/Ed last Sunday that Papandreou do two things to shore up the value of the Greek bond: pay himself, his government and members of parliament in Greek bonds, and accept bonds in payment of tax obligations. His tongue is in his cheek, of course, but he does expose the basic truth that even the Greek government seems to agree with markets in the devaluation of its paper. That devaluation represents less the potential of Greece to provide for itself, and more the dearth of apparent political talent to lead the way.

Measures announced on 11 and 21 September 2011

On the cost-cutting side, Greece announced yesterday that it will suspend 30,000 workers from the public payroll this year, and survey areas where it can make further cuts in 2012. It will also harmonise pay grades across the public sector to quash favouritism and discrimination. The private sector will not escape unscathed. Pensions above 1200 euro a month will be slashed by a fifth.

On the revenue-generating side, the government announced that it will extend to 2014 an annual property tax it unveiled on September 11, which ranges from 0,50 euro to 14 euro per square metre. (German Finance Minister Wolfgang Scheauble expressed doubt about how effective the tax could be this year). The income tax threshold will fall for the second time this year, from 8,000 euro to 5,000 euro.

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