Wednesday, 6 July 2011

From Players to Mere Spectators

Despite the drama, the protests, the widespread moaning and shouting surrounding the recent narrow approval of austerity measures imposed by its European partners the Greek government will look back on that vote as the easy part of the long-overdue reform process. When you’re in water way over your head and going down for the third time you tend to climb on any life boat that comes along and worry about the conditions of your rescue at some later time.

Now, if Greece’s political leaders are serious about the country’s long-term health, they face the extremely difficult task of actually reforming the stagnant, self-serving economic system that has become completely dysfunctional over the last several decades. Unfortunately, so far none of the political parties has demonstrated the strong will that is required to undo the structure that generated the current quagmire because it is that very structure that has, up to now, kept them in political power. Every time the political leaders attempt to unravel the tangled web of the Greek economic structure and smooth the way for personal initiative the affected interest groups – ranging from self-important bureaucrats to taxi drivers – threaten retaliation. And the politicians beat a hasty retreat.

On top of this problem there is even some question whether the political leaders truly understand the gravity of the situation they face. Newly appointed finance minister Evangelos Venizelos recently went to Brussels and attempted to re-negotiate the most recent bail out agreement. Before the words were out of his mouth the usually mild mannered Finnish commissioner Olli Rehn angrily told him that renegotiation was out of the question. Prime Minister George Papandreou addressed a European gathering of socialists and slammed the rating agencies for suborning democracy in Greece. Papandreou seemed unaware that the rating agencies were merely responding to conditions that he and earlier generations of Greek politicians had created. Opposition leader Antonis Samaras is not much better. His contribution to the debate is that Greece should be lowering, not increasing taxes. He may be right, but his point is irrelevant because there is absolutely no chance that Greece’s paymasters in Brussels will buy that one. So far Samaras has resisted any attempt to climb out of the rut of narrow, short term political interest and join in a national coalition to forge a better future for Greece. If he did join a coalition he might actually have to come up with some positive, realistic suggestions.

He misses the point in that the actual tax rate is less important than collecting taxes at any rate. So far no Greek government has been particularly good at this. Samaras says he wants a ‘creative shock’ for the economy that lower tax rates could bring. Again both he and Papandreou miss the point that there is a great deal they could do to ramp up the Greek economy without spending a penny. Simplifying obscure regulations that strangle innovation at birth, modernizing the legal system, eliminating over-lapping jurisdictions in ministries, etc., etc. could encourage investors to take a more favorable view of Greece.

As one Greek friend put it, “Right now there is no sign that our so-called leaders recognize their errors. The first step in any recovery is for each and every one of our politicians to get on their knees and apologize for their mistakes and the mistakes of their fathers and grandfathers. Then we might actually get somewhere.”

The reality of Greece today is that it has lost control of its own fate. Mandarins in Brussels, Paris and Berlin have more influence than Greece’s own politicians. Jean-Claude Juncker, Prime Minister of fiscally prudent Luxembourg and head of the Euro Group, put it bluntly in a recent interview that Greece faces a ‘massive’ reduction in national sovereignty. This is a very hard pill to swallow for people who believe they brought democracy and civilization to the rest of Europe.

This situation is nowhere more evident than in the Greek banking system. Every Greek bank went on a lending binge over the last several years that saw the loan-to-deposit ratio climb to more than 130%. This is no problem if you have reliable funding to cover the yawning gap between deposits and loans. Now, however, the only funding source available to the Greek banks is the European Central Bank. And if Greece ever falls into formal default this funding is in real danger. And it does not help matters that the flow of deposits out of Greek banks has picked up from a stately walk to a jog. Any more bad news and the jog could move up to a sprint. Their fate is entirely in someone else’s hands.

The tragic irony of this situation is that if the Greeks had devoted half the energy they spent on fiddling an admittedly corrupted system to real economic activity the country would be flourishing. If Greeks who loudly proclaim their patriotism demonstrated this patriotism by actually paying taxes instead of resorting to every dodge known to man and God their country might have been able to retain a vestige of sovereignty. Instead of major players in this drama, they are reduced to mere spectators.

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