This article and an accompanying television report were published by Al Jazeera.
Germany’s
election means something to almost everyone in Europe. To the Greek street, it
signals the point when the government ought to pluck up the courage and ask the
Eurozone to forgive a big chunk of its onerous debt, which now stands at 174
percent of its GDP.
Four years of
austerity have succeeded in eliminating a $49 billion budget deficit even while
the economy shrank – a painful process akin to playing the piano while someone
breaks your fingers. Having done this, Greece finds that its economy has shrunk
so much, it is barely able to service its debt. Interest last year cost $16bn, placing
the country in what one economist calls a “debt bondage”.
The debt also
acts as a barrier to growth, creating a vicious cycle. “No-one wants to invest
in a country which is uncertain, which has lost confidence, which is
shrinking,” says former finance minister Nikos Christodoulakis. Apart from the
risk, there is the reality of high taxes.
Angela Merkel’s
government has lent the Greeks money on the principle that German taxpayers
will never have to pay for the European periphery’s debts, so it seems that the
Greeks will be disappointed in their quest. The problem is that most Greek
economists no longer see the country’s rescue package as viable without serious
intervention.
“It is highly doubtful whether this rate of tax extraction
from a moribund economy can be maintained,” says Athens University economist Yanis
Varoufakis. He is admittedly one of the Greek rescue plan’s most severe
critics, and has predicted that the euro will ultimately meet its Waterloo in
Greece.
Varoufakis is not alone, however. “You need fresh money in this country,”
says Gikas Hardouvelis, a proponent of the Greek rescue. As chief economic
advisor to Prime Minister Loukas Papademos, he played a leading role in
negotiating Greece’s second facilitation loan last year. “Otherwise we’re going to lose our youth, the
country is going to shrink and we’re going to be taken over by foreigners.”
Merkel’s
opponent, Social Democrat leader Peer Steinbrueck, espouses the idea of a
massive investment package for the European periphery – a second Marshall Plan;
but his party is trailing the ruling CDU in the polls by about 10 points.
Greece was
essentially bankrupt when it lost the ability to borrow affordably from markets
in early 2010. It accepted some $300 billion in facilitation loans from the
European Commission, the European Central Bank and the International Monetary
Fund – the notorious ‘troika’ – who feared a collapse of the euro as a currency
should Greece be allowed to fail like a massive Lehman Brothers. In return, Greece
had to commit to painful spending cuts.
The result of
austerity is that the economy has lost 26 percent of its size and is still
shrinking. Unemployment is the highest in Europe at 27.9 percent, and twice
that for the young. Wages have fallen sharply for those who do still work – by about
23 percent in the private sector and as much as twice that in the public
sector.
Prime Minister
Antonis Samaras put a brave face on things in an annual economy speech earlier
this month. “Greece is turning a new leaf. Its economy, after six years of
recession, is turning a new leaf,” he said, predicting recovery in 2014. The
government is claiming to have finally reached a budget surplus before debt
servicing is factored in. It also sees a lower-than-predicted recession in the
second quarter (-3.8 percent instead of -4.6 percent) as heralding the
beginning of an upturn to growth.
The government
has been quick to grasp at straws before. In late spring Samaras foresaw unemployment
stabilising. In January his finance minister, Yannis Stournaras, foresaw a
return to growth by the end of the year. Both predictions were confounded. Could
this time be different?
Greek
economists think not. They are deeply skeptical about the primary surplus,
attributing it to the government’s withholding payments to private sector suppliers
and Value Added Tax returns to businesses, and allowing the social security deficit
to widen.
They converge
on the view that the recession is slowly lifting, but that this merely leaves
the economy moribund. “A starving person sheds a large
portion of his weight in the first few weeks. As death approaches, the rate of
weight diminution declines to zero,” says Varoufakis dryly.
When $140bn of Greek debt was written off in March 2012, there
was an optimistic camp, which felt that Greece’s finances were going to be sustainable.
That camp is now deserted because financial markets still won’t touch Greece.
At the very least, analysts expect Greece to be given
another reduction in interest (it has already fallen from five percent to 3.1
percent) and an extension on the maturity of its loans. But this is merely to
prevent a collapse in instalments.
Growth is a more elusive goal. The Greek banking system
cannot finance it because it is itself bankrupted by the level of nonperforming
loans. Two years ago the government brought in the financial consultants
Blackrock to audit the banking system. “Blackrock found that about 30 percent of loans were
nonperforming in 2011. Now it might well find twice that proportion,” says
Christoforos Sardelis, who created Greece’s Public Debt Management Agency in
2000, and now works at the National Bank of Greece.
Five ways
out
Austerity has
led to such a massive sapping of public and private wealth that the recovery
has to come from outside, most Greek economists say. Their ideas fall into two
categories – those that reduce debt and those that would bypass it to nurture
growth.
“I
think the eventual solution for the Greek debt problem will be some form of
debt-equity swap,” suggests Hardouvelis. “We owe at this stage over $288bn to
our European partners, and everybody is asking how to get rid of that wolf that
scares investors. The best way to do it is to say, ‘let’s swap debt for equity,
and come in and invest’. Land is the easiest thing to do… take a rocky island
for 100 years... I don’t see any other solution.”
The idea of
mortgaging sovereign territory to Germans might be politically controversial,
but it kills two birds with one stone, generating revenue and reducing debt at
the same time.
Christodoulakis suggests a different kind of swap between
Greeks and Germans. Germany coerced two loans out of the Bank of Greece in 1943,
during the Nazi occupation. These were never repaid, and Christodoulakis
estimates their current value with interest at over $21bn – roughly, he says,
Germany’s contribution to Greece’s first facilitation loan in 2010.
“I
think that a very fair compensation and settlement of the issue would be to
count one for the other… It would reduce the amount of Greek debt by 8-10% of
GDP.” This idea enjoys overwhelming popular support in Greece, but has been
ruled out by Germany.
Sardelis focuses on growth. He believes that a “risk
transfer” to an internationally recognised body would unlock liquidity to the
south.
“The European
Investment Bank or the European Central Bank or some other institution needs to
take on the role of loan guarantor. That would enable [banks] to issue loans to
the peripheral economies on looser terms,” he says. “When trust breaks down
someone intervenes and restores it. This isn’t happening,”
Left-of-centre economists focus on how Greece might
regenerate itself without a wealth transfer from the outside. Savvas Robolis,
who heads the Labour Institute, believes that Greece could generate half a
point of GDP and seven thousand jobs just by restoring minimum wage to 751
euros a month. A controversial law in February 2012 lowered it to 586 euros
despite the protestations of the Greek business community that taxes and state
bureaucracy were a far more pressing concern. Unemployment has continued to
rise, suggesting that the measure was far from successful.
Also in the self-sufficient camp, Varoufakis doesn’t think
Greece can recover if it attempts to service its debt while it remains in
recession. “Greek debt will remain sky high while Greece’s GDP will continue to
shrink,” he says. He believes a new
contract between Greece and the troika should make Greece’s repayment schedule
“dependent only on Greece’s GDP growth rate.” Greece’s left wing opposition has
embraced this suspension of interest payments; but Hardouvelis believes it would
“strain relations with Greece’s Eurozone partners” to the point of getting it
kicked out of the EU.
Greece is not alone in its financial asphyxiation. The
single currency showed up weaknesses in the competitiveness of southern
European economies and helped channel investments to the north.
Panayotis
Petrakis, an economist at Athens University, describes this unequal structure
as “the new normal”. He divides the Eurozone into “a productive centre, which
concentrates capital from the periphery, which will have 27-30 percent unemployment.”
But Greece is singled out by the length and stubbornness
of its illness. Portugal, Spain and Ireland have begun to see a pickup in their
exports, bring in fresh money to pay off debts. Greece’s pickup has been much
slower – an indication of the investor-unfriendliness it has to fix at home,
and this is the nub of the problem.
“Suppose for
twenty years we have no problem with the debt,” says Hardouvelis. “Are we going
to fix a country that generates the income that, when the time comes, enables the
future rich Greeks to pay back the debt? … The question always comes back to
us.”
