We Have Seen This Bad Film Before

Financial markets were crumbling. A seat on the Stock Exchange costs less than a taxi license. There was a sense that the centre could not hold against:

·                    Uncontrolled expenses

·                    Declining revenues

·                    No access to debt markets

·                    Powerful vested interests blocking any changes

·                    Fraudulent accounting

·                    Soaring deficits

·                    Near bankruptcy

Athens in 2012? No, New York City in 1975. After wrestling with these conditions for years the city faced the very real prospect of default on its bonds and bankruptcy in 1975.

Rating agencies had downgraded the city’s debt. The banks were unable to find any buyers for the debt required to roll over New York’s obligations. On top of this the state and federal governments had turned down any additional assistance on the grounds that the city first had to get its own financial affairs in order. Essentially the city was threatening the state and federal governments with the potential chaos of a huge municipal bankruptcy unless it got the required aid. The state and federal governments, for their part, were using the lever of potential aid to force the city to make hard choices.

New York On A Chilly Day

This stand-off culminated in the refusal of President Gerald Ford to give federal aid in October 1975 and the classic New York Daily News headline the following day. Ford to City: Drop Dead.

Change the names and you have the current stand-off between Greece and the European Union. But there is one major difference. In 1975 New York was fortunate to have several brilliant financiers and a strong governor who were given the scope to devise a bold, imaginative program involving compromise, increased state control of the city’s finances, additional state aid, and, ultimately, federal assistance. There are undoubtedly equally brilliant financiers inside and outside Greece willing to help. But, for now, they are on the sidelines while official Greece and the European Union offer only a collection of midgets who confuse self-defeating micro-measures with the bold reform required to pull Greece and the rest of the EU out of a downward spiral.

On the night of the Daily News Headline, financier Felix Rohayton was having dinner with Governor Hugh Carey at the restaurant Elaine’s in the city. When he heard of the federal rejection Rohayton recalls “I thought it was the end of us. But he (Carey) thought it was the beginning of winning. He was right.” Rohayton was to lead the Municipal Assistance Corporation set up by the state to raise money for the city. The Emergency Financial Control Board was established to bring order to the city’s chaotic financial management. The unions saw the light of day, and finally compromised on job cuts and salary adjustments.  The rest, as they say, is history. New York regained its fiscal balance and went from strength to strength – even overcoming 9/11.

What is so troubling about the Greek situation is the how rhetoric is getting further and further away from reality. The electoral fortunes of the Greek political party Syriza have risen sharply as it attacked the ‘barbarous’ conditions of the memorandum accompanying more than €100 billion in aid. The conditions are indeed tough, but then the hole that the Greek state dug for itself is very, very deep. The party makes no mention that this assistance, however tough, is keeping Greece afloat right now.

Syriza has cleverly and successfully changed the terms of the debate from overdue reform of the Greek state to the supposed evils of the Troika (European Commission, IMF, and the European Central BNK). Just listen to one Euclid Tsakalotos who calls himself an economics professor at Athens University.

“That isn’t the Europe that the original inspirators (?) of Europe imagined. We’re demanding a more democratic, a more social and a more just Europe.” Forget the fact that Greece is not in a position to demand anything, this whining and pugnacious attitude is not going to help Greece very much even if it finds some support in Europe.

Not a word here about the desperate need for structural changes in Greece. He simply wants the northern Europeans to hand over billions more in assistance without any annoying conditions. He completely ignores the inconvenient truth that without those painful changes Greece cannot possibly recover whether in stays in the Euro or not.

The pity is that many of these structural changes do not involve vast amounts of money. But they do involve taking on very strong vested interests like the bloated civil service, professional organizations, and even academia that have stifled growth and change in Greece for so long. It is these changes, far more than the abused and hated ‘austerity’ that will help Greece get on its feet.

Sadly, the rhetoric on all sides dances around this point. Syriza clearly doesn’t think they are important. The Germans prefer to force Greece into an ‘austerity’ program before focusing on the deeper structural changes. Only IMF Director Christine Lagarde recognizes the importance of reversing the order of austerity and structural change. But she was overruled by Chancellor Angela Merkel who faces an electorate furious at giving another of their precious pfennigs to Greece.

It would be nice if Greece and the EU could take a page out of New York’s book and come up with some bold decisions that actually address the whole issue of the viability of the Euro itself. Otherwise we may well see a Greek headline: Merkel to Greece: Drop Dead.