Thursday, 25 August 2016

The morning after: Why Greece's financial crisis gives Europe the jitters

Game Over, by George Papakonstantinou, Papadopoulos Publishing, 2016
ISBN 978-960-569-600-9

A slightly edited down version of this book review was published by the Weekly Standard. 

George Papakonstantinou has been through hell. His reputation as the finance minister who co-wrote and signed Greece’s first bailout agreement with the Eurozone in the spring of 2010 cost him his cabinet post the following year and his parliament seat the year after that. He spent the next three years fighting charges that he tampered with state documents to help relatives evade taxes, which could have jailed him for life.

During all this time, Greece went through four changes of government, each bringing more pain and austerity than the last, while its recession spiraled into a full-blown depression. Both socialists and conservatives found it convenient to make a sacrificial lamb of Papakonstantinou as the bringer of austerity. Under indictment it became impossible for him to appear in public because he was openly vilified. Unable to do so much as take out the trash, he lived effectively under house arrest.

Last year, however, the Supreme Court acquitted him, and Game Over published this year is Papakonstantinou’s moral comeback – an attempt to pare away the paranoia and suspicion that have hounded him, and recast the record of his time in office - from October 2009 when the socialists swept to power, until June 2011 when he was ousted - on the basis of fact.

“For five years, I believed reality was so compelling that it would shape attitudes,” he says. “Instead, common sense and pragmatism gave way to conspiracy theories and hatred… I was amazed by the power of populism in shaping people’s minds.”

That populism filled the body politic throughout the crisis like seawater pouring through portholes, sinking government after government. First conservatives, then leftists, promised to abolish austerity and bring growth. They did neither, though the conservatives did complete the balancing of the budget.

Papakonstantinou describes accurately how this lack of bipartisanship not only raised the political mortality rate, but also scuttled Greece’s negotiating position at critical moments. “The power of experience is immense,” he says, explaining why Greek voters constantly fell for false promises. “What you do not experience has no comparable weight.”

Papakonstantinou correctly blames the factional, egomaniacal and populist character of Greek politics for Greece’s failure to face a national crisis with a national front; but he omits to mention that his own party behaved in exactly this way when in opposition, killing crucial education reforms in 2005-6. He also fails to mention that it was the socialists who instituted deficit spending on a massive scale in the 1980s, setting a standard for the profligacy of future governments that led to today’s €328 ($360) billion debt.

As a member of the Eurogroup – the informal council of Eurozone finance ministers - Papakonstantinou also provides an insider’s account of the painstaking process through which the Eurozone gradually realised it had to provide a distress fund for Greece, later enlarged to cover other governments priced out of the money markets.

The idea wealthier Eurozone members never came around to, however, was that some sort of debt reprofiling would be necessary to give underwater Eurozone economies time to rebuild growth. The International Monetary Fund now asserts that Greek debt is not sustainable and suggests extending Greek repayment schedules to the end of this century. But German Chancellor Angela Merkel and other fiscal hardliners like Finland and the Netherlands accepted the distress fund only on condition that their taxpayers would recoup their money. Rescheduling the debt of Greece would amount to a transfer. The Eurozone instead forced heavy losses on private holders of Greek bonds in 2012, which made markets even more skittish.

Game Over does more than portray a Eurozone led by markets, its policies slithering on the belly of necessity. It tracks how the sovereign debt crisis elevated Germany to the status of indispensable monetary power with the ability to veto ideas, like debt rescheduling, it doesn’t like. Game Over describes how even France, an economy nearly as large as Germany’s, fails to act as a counterweight.

It also seems to forecast Greece’s exit from the Eurozone. By the time Greece signed its third bailout agreement last July, it had already defaulted on the IMF with no visible repercussions from markets to other Eurozone economies. The systemic risk of letting Greece default is now provably zero. German finance minister Wolfgang Scheauble had first suggested in September 2011 that Greece take a leave of absence from the euro. By denying Greece a debt rescheduling, he now appears to have set the trap for Greece to abscond. Sacrificing the Greeks helps keep other Eurozone economies in line. Since Ireland, Portugal, Spain and Cyprus have returned to markets, the Greeks can be blamed for their own fate.

Austerity and taxes

By cataloguing a series of errors, Game Over makes the vast implication that had both Greeks and the Eurozone done all the right things at the right time, Greece would have preserved its sovereignty, its recession would have been contained, its debt sustainability would be assured and the crisis would never have spread to other Eurozone members.

Could all this have happened? Game Over is too much a defence of what Papakonstantinou did do - cut the deficit by more than a third and improve accountability – to address the broader issue. But it is clear that the good case scenario would have required more radical steps than anyone was willing to take: Greece would have had to attempt nothing short of an assassination of its nefarious state, and the Eurozone would have had to issue Eurobonds – bonds centrally assured by the entire membership of the single currency. The consensual instincts of Prime Minister George Papandreou ran against the first, and Europe’s wealthier states stood against the second.

Modernising Greece incrementally was the result. That has been painful in the extreme, because politicians proved more adept at cutting spending and raising taxes than redesigning the state and planning to boost strategic areas of the economy.

Greece’s low taxes used to make up for its red tape, but this competitive advantage is gone. In 2008, at the height of its borrow-and-spend profligacy, Greece took €57 ($63) billion in tax revenue from an economy worth €242 ($266) billion. Seven years after Wall Street’s financial meltdown, the economy had shrunk by 27 percent to €176 ($193) billion, but tax revenues were only marginally lower at €51 ($56) billion. The Greeks are paying more or less the same taxes on much lower income.

That transition is on the European statistical record. In 2008 tax revenues represented 32 percent of the economy compared to an EU average of 39 percent. Last year they were 39 percent, compared to the EU average of 40 percent. A pension reform passed last May will raise the tax burden much further.

Looked at from an individual standpoint, too, Greeks are now as highly taxed as anyone in Europe. The average single worker pays 39.3 percent of income to taxes and social security in the latest OECD figures to be released, compared to an average of 35.9pc.

This was done by constantly shifting the tax focus. As unemployment rose and revenue from personal income tax slipped (from €11.6 ($12.7) billion in 2008 to €7.8 ($8.6) billion last year), governments raised sales tax and consumption taxes to make up the difference. But consumption and sales, too, fell after 2011, so new taxes were introduced – principally on labour and property.

Greeks survived all this partly by tightening their belts, partly by spending their savings (bank deposits have fallen by 60 percent during the crisis) and partly by working and trading in an extensive black economy.

It is this last, difficult-to-quantify aspect of Greek survival, that has encouraged hardliners among Greece’s creditors to keep pushing for higher taxes, evidently believing that taxes that look unreasonable on paper work in practice because they draw on unregulated income. Thus under the government’s latest pension reform, workers are called upon to pay 24.5 percent of their income towards social security, seven percent towards the national health system, as well as 22-45 percent income tax.

The effect of these taxes is to push Greeks further from regulation and destroy any culture of payment. By assuming dishonesty, the government is cultivating it. Those who don’t go underground, go abroad. A recent survey by Endeavour Greece, a nonprofit promoting high-value startups, found that four in ten businesses are thinking of relocating abroad for tax reasons, up from a quarter last November. Capital drain was preceded by brain drain. Greece’s statistical agency has found that Greek society has suffered a net loss of 270,000 people since 2008. In short, the declared economy is disintegrating, and as a result, so, is society. Live births have been falling since 2006. Three years ago they slipped below the death rate and are still falling.

Greece does need more austerity, but that now needs to be focused solely on shrinking the bloated state, and using the proceeds to provide a survivable environment to businesses that want to stay honest. Before the crisis, one in four employed people worked for the public payroll. Today, that is still the unacceptably high ratio. The ruling Syriza will not rectify this because it is a defender of big government.

The bold proposals Greece needs to resurrect itself cannot be discussed with creditors who fundamentally distrust the Greeks and each other. So no one is currently in a position to empower willing and able Greeks to pull themselves up by the bootstraps. This is clearly not at all what either Papakonstantinou or the Eurozone had in mind when they instituted the first bailout, but the politics of necessity, which Papakonstantinou amply describes in Game Over, have become the politics of overlordship.

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