Tuesday, 30 June 2015

The Greek Crisis Has Some Dreaming Of Independence -- From Athens

The only funny thing about the sad situation in which Greece finds itself is reading essays about what the Greek people ‘must’ or ‘must not’ do from renowned economists and leading academics writing comfortably from their offices thousands of miles from the turmoil. They are not the ones lurching from crisis to crisis worrying about when the money runs out, when the pharmaceuticals run out, when their pensions run out, or even if the food runs out.

Even Nobel Prize-winning economists like Paul Krugman urge the Greek people to rejectthe latest proposal from the creditors and risk leaving the Euro and returningto the drachma. Surely, he opines, this would be better than submitting to the even greater ‘austerity’ required by the creditors. Greece would be free of the creditors’ shackles and resume growth quickly. Nothing demonstrates the dangers of long-range analysis better than this.

In a perfect world Krugman might be right. If, and it is an enormous ‘if’ Greece had a smoothly functioning bureaucracy, a government determined to institute sweeping reforms, a political class not wedded to corruption and cronyism, and no deeply entrenched groups from  protected business interests to pampered public service employees with a strong interest in preserving the dysfunctional status quo such a recipe might work. But, alas, we are dealing with the reality of modern Greece and not some theoretical classroom exercise. And that sad reality is that without those sweeping reforms what remains of the Greek economy, regardless of the currency in use, will most certainly contract further.

Syriza could have been an agent of change. It could have instituted long-overdue reforms and, in the process, generated the revenue to improve the welfare of the people. Instead, it has proven to be nothing more than an extension, a particularly incompetent extension, of the failed political system that has decimated Greece over the last several decades. And the sad thing is if it had committed to these reforms it could have minimized the hated ‘austerity’. And the really sad thing is that the price of this intransigence is being borne by the very people Syriza said it wanted to help – the poorest sectors of the Greek population.

It chose instead to implement its school-boy theories, which by the way have not worked anywhere in the world, and substitute revolutionary rhetoric for real achievement. In the process their hypocrisy and deceit have succeeded only in alienating just about everyone who was in position to help. It would have been interesting to see, for example, if the creditors would have taken a softer tone if the government had moved aggressively on revenue producing reforms like privatization or breaking the stranglehold of protected businesses. But all we heard were thunderous pronouncements against such steps. One could almost hear the Euro Group, the IMF and the IMF pleading with Syriza to ‘give us something to work with.’ But the only thing that emerged were half-baked demands for debt reduction. Fine, but in return for what – precisely? I can imagine Christine Lagarde, managing director of the IMF, asking the Greek government what it would do to help itself.

One can argue that the European institutions made a serious error a few years ago by bailing out the private banks that had recklessly loaned massive amounts to Greece. How often should tax payers be required to rescue private banks that should have known better? When do they these banks have to pay the price for their mistakes? Wouldn’t it have been much better to force those foolish banks to take the necessary hair-cut to reduce Greek debt to manageable levels? The problem was only compounded when public institutions assumed that debt. All this may be true. But, as The FinancialTimes Martin Wolf puts it, those are now ‘sunk costs’ and it is time to move on.

Meanwhile the drama is played out on the streets of Greece as most economic activity grinds to a halt pending the outcome of Sunday’s so-called referendum called by Prime Minister Alexis Tsipras. The 72-word question is a ridiculous summation of complicated financial discussions that very few people can possibly understand. The legal grounds for the referendum are not even clear, because currently there is NO deal on the table. What, exactly are people voting on? Whatever the stated question may be, most people seem to understand that the real issue in this referendum is Greece’s position not only in the Eurozone but in the European Union itself.

A friend on the island of Andros had an interesting solution to his anger at the government and the uncertainty of the current situation – independence. “We should immediately declare independence from the oppressive, idiotic regime in Athens! We could build a real economy here based on out maritime history, but including other centers of excellence such as financial and health care.” All it needs now is a Declaration of Independence. We are, after all, close to July 4th.


Anonymous said...

You may think that "The 72-word question is a ridiculous summation of complicated financial discussions that very few people can possibly understand." but anyone who has read the proposed schedule and reads between the lines WHAT the IMF, EE etc are asking for knows that NO is the only acceptable vote for that referendum. There is a Greek proverb saying "other f...s, other pays" . WE HAVE PAYED TOO MUCH for these financial gangs, so excuse us...it's time to stop (KNOWING THAT IT WON'T BE EASY AT ALL)

betty lagogianes said...

Mr. Edgerly,
I've been looking forward to your comments on this crisis point of the ongoing and never-ending (it seems) crisis.
But is it really ok to simply acknowledge that public bailing out of creditor errors in judgment (which, let's be honest, were well understood on a risk basis at the time and simply assumed in the pursuit of profits)? Is this much different from the U.S. crisis, and were the poor sops who took out 'bad' (i.e., unmanageable) mortgages and who ran up their credit (yes, they were irresponsible, like the Greeks who did the same and did not pay taxes properly either)? Were those debtors blamed ad infinitum for the crisis there? No, they were not. I live in Canada where one pays hefty taxes and (I, at least) happily so, for what it brings us in the way of a civic and civilized society (which, by the way, under our Conservative government, has eroded significantly, but that's another story). but I cannot help but empathize with the Greeks (yes, some are relatives) in this awful drama. IF I were a Greek citizen, I would vote NO simply to change the game. The ruse of a functioning Eurozone I think is up. Sometimes, one simply has to move on to something different.

David Edgerly said...

I'm afraid there will be very little economic improvement in Greece and very little improvement in living standards regardless of the outcome of the referendum until all strata of Greek society realize that major, fundamental reforms are required in all segments of the economy. Sadly, Syriza is no different from any of the other failed governments in refusing to realize this. I would like to see at least one Greek politician admit the errors of the past and pledge to implement the reforms required to give Greek children a decent future.

Anonymous said...

How would you make the necessary reforms for a better functioning Greek economy? What countries, if any, are you aware of that were similar to Greece, implemented reforms and are now doing well? How could Greece, even with modest growth, be able to pay down debt which is at 175% of GDP? Lastly, aside from working as an investment banker what are your academic qualifications?

David Edgerly said...

It doesn't take a doctorate to realize that Greece has many underutilized assets like ports, old airports, a railroad, shipyards that could be leased to generate employment and revenues to benefit the weakest segments of society. Breaking up monopolies and other protected businesses would lower prices for all Greeks. Collecting taxes and ending corruption would also be nice. This is just a start. Of course there has to be debt relief, but in return for some definite progress by the Greek government itself. By the way, Ireland and Portugal have helped themselves quite nicely since the depth of the crisis.

Anonymous said...

What monopolies and protected business do you have in mind? (I don't live in Greece so it would be helpful to go into some background on this, if you could?) How would you collect taxes and end corruption? I've read that it's not a case of tax evasion as it is tax immunity--primarily the shipping companies. Is that the case? If that is, indeed, the case, I understand that many of these shipping companies are privately held, organized, in many instances, as Panamanian companies, which issue bearer stock; that is to say, these companies legitimately don't have to disclose ownership. How do you fairly asses taxes in that instance, especially when many of the revenues these shipping companies receive are paid overseas? Shipping is also the second largest industry in Greece after tourism, isn't it? Following that logic then that's a big segment of the economy that either doesn't pay taxes or pays a negligible amount. How do you think countries like the UK or US would handle this dilemma?

I hear you about Portugal and Ireland and that is a good point. They are both Western European countries that have been through the Renaissance and the Enlightenment. How does that factor in, if at all?

Greenspan in an interview earlier this year said that without political union you can't have economic union. What do you make of that? Also in the US, as I understand it, there are some states that will always economically outperform other states. For example, New York, California, and Illinois have always outperformed such states as Missouri, New Mexico, and North Dakota etc.. The states don't keep tabs of who owes whom what. That's how it works. The Constitution was also designed to protect the weaker and smaller states against the larger ones. In Europe you can see some of this in countries like the UK where the South has been more economically vibrant for a long time. Similarly Northern Italy has always outperformed Southern Italy. So it is with the EU. Alas, the EU is not a single country, so how do you remedy this disparity?

Lastly, Dr Paul Craig Roberts, a Reagan Appointee to the US Treasury and an emminent economist, has been very outspoken that Greece should default and go back on the drachma to regain it's sovereignty and reorganize like Iceland. What do you make of that?

betty lagogianes said...

I also came across this rather dense article about the crisis that states this in its summary: (http://blog.mpettis.com/2015/02/syriza-and-the-french-indemnity-of-1871-73/)

The euro crisis is a crisis of Europe, not of European countries. It is not a conflict between Germany and Spain (and I use these two countries to represent every European country on one side or the other of the boom) about who should be deemed irresponsible, and so should absorb the enormous costs of nearly a decade of mismanagement. There was plenty of irresponsible behavior in every country, and it is absurd to think that if German and Spanish banks were pouring nearly unlimited amounts of money into countries at extremely low or even negative real interest rates, especially once these initial inflows had set off stock market and real estate booms, that there was any chance that these countries would not respond in the way every country in history, including Germany in the 1870s and in the 1920s, had responded under similar conditions.

David Edgerly said...

The response to the valid points raised by Anonymous unfortunately requires a book rather than a blog comment. The entire Euro concept was flawed in that it assumed a single monetary policy would somehow bind together countries with vastly different fiscal policies and who were at vastly different stages of development. In hindsight Greece should never have joined the Euro zone in the first place and should have been left free to adjust its currency and interest rates to its own level of development. My problem now with Stiglitz, Krugman et. al., after more than 10 years with the Euro, is that their recipe for return to the drachma assumes that Greece has a smoothly functioning political and economic system that can handle the transition without serious back-sliding. My experience is that Greece has a severely dysfunctional political and economic system, and that any return to the drachma would merely mean a return to the very system that brought Greece into this situation in the first place. In addition, because of the strong Euro and low interest rates, much of Greece's economic infrastructure has been eroded by 10 years of relatively cheap imports replacing more expensive locally produced products. This process is extremely difficult to reverse. For example, the vast majority of everything Greece eats and drinks is now imported.Difficult to pay for this with a rapidly depreciating drachma. I lived through a similar situation in Turkey for several years and saw first hand the devastation that type of currency movement causes society in general. I would hate to see the same thing happen in Greece.

Anonymous said...

So what I hear you saying is that it's a case of damned if you do and damned if you don't where Greece is concerned? Where are the modern day Hamilton's and Madison's, who can author a 21st century equivalent of the "Federalist Papers?" I have read that Europeans aren't keen to become closer politically, and, at this point, it might be the only sensible way forward. Not dissimilar to how China worked through its "Waring States" period. Will the Germans assume the role of the ancient Qin dynasty?

Anonymous said...

Or Greece could become the Puerto Rico of the EU--a Commonwealth Country. It benefits from the EU and is not fully part of it. That might be a happy medium?