Friday, 26 October 2012

A Snapshot of Where Greece is Today

The following is the preamble to a talk delivered at Cornell University on October 18. The talk was entitled The Makings of the Greek Crisis. The Cornell Chronicle published a summary of the lecture.

Greece has, over the past three years, descended to a desperate position.

Financially, it faces a potentially unsustainable debt burden of about 350 billion euro, roughly 175 percent of GDP. It is technically bankrupt since March 2010, when it sold its last multiple-year bond at 6.5 percent interest. It is effectively locked out of markets and unable to refinance its debt. It still has not eliminated its deficit, though it has cut its deficit from 36 billion euro in 2009 to a forecast 13.3bn euro this year and 8bn next year.

Economically things sound even worse. Unemployment stands at a nominal 25.1 percent for July, but that does not include underemployment (not everyone is working a 40 hour week), salary reductions, arrears in salary payments of up to six months, and the fact that many more people are expected to be laid off over the next year. For the 18-24 age group unemployment is above 54 percent, meaning that many young people who can choose to go abroad.

Competitiveness has plummeted by all indices. Greece is 90th in this year’s Competitiveness Index, carried out by the World Economic Forum, down from 83rd the year before, and that downward pattern has been a constant since 2004. The World Bank’s Ease of Doing Business index puts it at 100th place out of 183. Perhaps worst of all, Greece fares particularly poorly in the corruption department. Transparency International’s Corruption Perception Index puts it at 80th place, alongside Colombia, El Salvador, Morocco and Peru, compared to 42nd place a decade ago.

All these indices measure the extent to which Greece has become unattractive to investors. In all, Greece comes behind most or all the former Soviet satellites of Eastern Europe, which have been market economies, democracies and EU members for a fraction of the time that Greece has been over the last century.

Greece remains a net importer, though its export ratio has improved, and suffers from high inflation, suggesting that markets are still not working. It is now in its fourth year of recession, having lost a fifth of its economy, and is forecast to shrink by another 4.2 percent next year (a compromise rate agreed by Greece and its creditors as a working hypothesis, though creditors think the rate is likelier to be five percent). Prime Minister Antonis Samaras, visiting German Chancellor Angela Merkel in late August, said Greeks had suffered a one-third drop in their quality of life since the beginning of the crisis.

Politically the repercussions have been severe, at home and abroad. Greece has suffered effective loss of sovereignty since its creditors, the European Commission, European Central Bank and International Monetary Fund, must approve its budgets and may veto spending decisions. (This, as we shall see later, has severe implications for the European Union as a consensual decision making body of equal sovereigns).

Greece’s credibility with other EU member states has collapsed. It is the only eurozone member to have been put under the Excessive Deficit Procedure (financial monitoring) three times for falsifying statistics. The eurozone has become increasingly hostile after Greece repeatedly failed to implement the reform schedule attached to its bailout or meet deficit targets. Many northern Europeans now see a cleavage in values between Greece and the rest of the EU, and think the Greeks un-European. (In fact Giscard d’Estaing, the French president who sponsored Greece’s membership in the late 1970s, this year declared it a mistake and the Greeks “not ready” for Europe). It is not unfair to say that nuisance value alone keeps Greece in the eurozone.

Domestically politics have been tumultuous. Traditional powerhouses, the socialist Pasok and conservative New Democracy parties, have sunk to less than half their combined voter base as people have moved to extremes on the left and right. About 45 percent of voters went to parties opposed to Greece’s bailouts, including the neo-fascist Golden Dawn and radical left Syriza. There is a real danger that support for bailout will erode, with serious consequences for the eurozone.

The following article was published by the Cornell Chronicle, Cornell University's newspaper, summarising the lecture. 

Journalist warns that Greece is on brink of bankruptcy

John Psaropoulos

Plagued by corruption, ineffective leadership and a large national debt, Greece faces possible bankruptcy and withdrawal from the eurozone -- the group of European nations that use the euro, said John Psaropoulos, an independent journalist for NPR, PBS and Al-Jazeera, speaking on campus Oct. 18 about the Greek financial crisis.

"[Greece has] got an unsustainable debt burden of about 344 billion euros. It is technically bankrupt, because the last bond it sold on the open markets was March 2010 and that would carry the coupon to 6.5 percent interest, which is unsustainable," said Psaropoulos. "In terms of competitiveness, we [Greece] are doing worse and worse."

According to Psaropoulos, the World Economic Forum placed Greece 90th out of 142 countries in its global competitiveness index, down from 83rd the previous year. And the World Bank's business report ranked it 100th out of 183. Moreover, Greece's standard of living dropped 30 percent over the last decade.

To mitigate its debt, Greece looked toward the European Commission, the European Central Bank and the International Monetary Fund for assistance. In May 2010, Greece received its first bailout of 110 billion euros. But apparently this was not enough, Psaropoulos said, so the European Union (EU) agreed on a second bailout of 130 billion euros early this year.

"The bailout policy may be unrealistic because Greek debt is unsustainable. Austerity programs may not work," he said.

Former Prime Minister George Papandreou's solution was to propose a referendum to default from the euro, which was ultimately overturned.

"Unilateral default may be catastrophic. Reversion to the drachma will cause inflation and decrease its value by 60 percent," Psaropoulos said.

Greece's 344 billion euro debt will increase to more than 540 billion, he continued. "The debt may be forgiven, but Greece will be shut out from international markets."

He added: "Greece has suffered a complete breakdown in credibility with its EU partners because it has falsified its statistics so many times that it is the only one of the 17 eurozone members to have been under the Excessive Deficit Procedure (EDP) three times." The EDP allows creditors authorization and supervision over a country's spending decisions. Three of the four times it has been imposed was on Greece.

"Greece, politically, has suffered a loss of sovereignty," Psaropoulos said. "Politicians are making such fools of themselves that they were actually losing the authority to govern," he stated.

Conservatives and socialists, who have been alternating in power for the past four decades, were unwilling to compromise, and the country lacked a national project since the 2004 Olympics, Psaropoulos said. Additionally, the series of handouts and nationalizations started in 1981 under Andreas Papandreou, George Papandreou's father, contributed heavily to the debt.

"Greece started borrowing tens of billions of euros for social programs," Psaropoulos said. "The political value was very damaging. Once you've started making handouts, you're locked into that set of promises for many years."

In addition, he said, those who knew the right people acquired entitlements that were hugely costly. He added: "Don't you want to set up this society in a way that is fiscally affordable now so that they don't have to clean up this mess? Most people don't seem to be answering 'yes' to that question."

The talk was part of the fall speaker series "Greece and the euro" sponsored by the Cornell Institute for European Studies' Mediterranean Initiative, the Johnson School of Management and the Mario Einaudi Center for International Studies at Cornell. On Nov. 5 and Nov. 6, Mayor of Athens Giorgos Kaminis will speak on EU funding and problems facing Athens, respectively.

Jacques Diec '15 is a student writer intern for the Cornell Chronicle.

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