Summary: The Greek people have locked themselves into a no-win dilemma since the first bailout in May 2010. They want to stay in the Eurozone, but hate the pressures applied by EZ leaders as the necessary price for the aid that keeps them in the Eurozone. Eventually the resulting damage will force them to leave, but the delay will weaken them — more unemployment, bankruptcies, capital flight, and social unrest. They will crawl prostrate to a new future. Today Megan Greene reports from the streets of this once-great nation as it sails to self-destruction. It’s a powerful warning to America.
Contents
- A note from Nouriel Roubini’s visit to Greece
- The feature article: Megan Greene reports from Greece
- About the author
- Other valuable recent articles about the Greek crisis
- For more information
(1) A note from Nouriel Roubini’s visit to Greece
Excerpt from “Beware the Ides of March“, Nouriel Roubini, 28 February 2012 (subscription only):
I attended a public debate on whether Greece should exit the EZ; three-quarters of those who attended were against that option. One caveat is that most of the attendees were middle class folks who work in the private sector, speak English, are europhiles and blame the government and public sector for all of Greece’s problems. Lower-income individuals, employees of the large public sector and left-of-center voters have different views.
In my conversations with a large sample of private-sector businessmen — shipping magnates, other manufacturers, representatives of the financial sector — and members of the government, a similar view emerged: No one wants to even consider an exit from the EZ. Many forcefully argued — without any evidence — that Greece doesn’t have a competitiveness problem — despite data suggesting that unit labor costs rose by over 40% in the decade before the crisis — and blamed all of the problems of the private sector on the inefficiencies and tax burden of the public sector. Again, this sample of prominent Greeks is obviously as europhile as one could get, so can be regarded as somewhat biased.
… it was quite dissonant if not outright disturbing to hear 5 billionaire shipping owners claim that they care about Greece, but forcefully argue that they should not pay a single penny of tax because: Their shipping businesses are highly competitive globally; they cannot afford to pay tax; and, if the authorities try to tax them, they would move somewhere else. With its own business elite being so willing to contribute to Greece’s fiscal problems, one may rightfully despair that the country can ever successfully tackle its tax evasion problems.
Like what I saw in Argentina in 2000-01, when most Argentines wanted to stick with the currency board and fixed peg to the U.S. dollar, most Greeks have an irrational faith that, by some miracle, economic growth and competitiveness will be restored without an EZ exit. Frankly, most discussions with Greeks become emotional rather than rational assessments of whether an exit from the EZ — with all the collateral damage that it would imply — would be preferable to 5 more years of depression after 5 years of a deepening recession.
(2) The feature article: Megan Greene reports from Greece
“Note from Athens: Feeling on the ground has palpably changed“, Megan Greene, posted at Euro Area Debt Crisis, 27 February 2012 — Reposted here with the author’s generous permission.
Introduction
I travel to Athens about once every six months and speak with as many contacts as I can, including top policymakers, bankers, journalists, economists and academics. On my most recent trip in mid-February, the feeling on the ground had palpably changed in a number of ways that have supported my view that Greece will eventually default and exit the eurozone, but probably not before late 2013.
Sorrow and bitterness
There has been a pronounced shift on the ground in Athens in terms of the sorrow and bitterness that Greeks express. Without exception each of the Greeks with whom I spoke — whether government officials or simply engaged citizens — expressed significant concern about the generations above and below them. Every person has a story either about a pensioner who is forced to pay ever higher property taxes while his pensions are rapidly shrinking and prices continue to rise, or of a younger friend or sibling with multiple master’s degrees who has had to work in call centres or café’s because there are no job openings commensurate with his experience. Greece has a very strong family structure, with parents typically subsidizing their children and with siblings helping to support one another financially. With pensions suffering a death by a thousand cuts and youth unemployment above 40%, families are having an extremely tough time making ends meet. Increasingly, those Greeks who are able to move abroad are considering doing so.
Many of the Greeks with whom I spoke also expressed a visceral bitterness towards the troika. This underlies the epic breakdown in trust between the troika and Greece, which has recently been reflected in the discourse between the two sides as they have negotiated a second bailout. Troika representatives have clearly noted the antagonism with which they are met in Athens, as they have quadrupled the number of bodyguards in their entourages over the past year.
According to most Greeks, the troika stands solely for a reduction in wages and pensions. Responsibility for this image of the troika lies with both the Greek government and the troika itself. When the troika established targets in the memorandum of understanding for the Greek government, it did not specify exactly how the government should reach them. The adjustment Greece was asked to make was sharp and unrealistic, and the Greek government took the most expedient route to try to achieve it — cutting wages and pensions — while using the troika as a scapegoat to shoulder the blame for the measures.
The public perception of the troika as harbingers of austerity has only made it more insulting when the troika has criticized the Greek government for a lack of progress in implementing the bailout programme. It is not true that the Greek government has done nothing overall. There has been a significant fiscal adjustment, with the burden falling primarily on the public. However, insufficient progress has been made in terms of structural reforms, which are far more important in terms of returning Greece to economic growth.
Desperation to be tethered to Eurozone
Despite the clear sense of despair and anger in Greece, politicians and members of the public continue to think that the alternative—default and EZ exit—would be even worse. A top official from New Democracy, the most popular party according to recent opinion polls and the party likely to lead a coalition government following upcoming elections in April, waxed at length about how much trouble Greece would be in if it exited the EZ. He highlighted that Greece has few export industries it could rely on to grow its way out of the crisis even if it devalued its currency. He conceded there is tourism, but argued that any profits from shipping are kept out of the country and green energy is still but a mere pipe dream as an export industry for Greece. Given that Greece is not self-sustaining in agriculture, he suggested that a devaluation accompanied by hyperinflation would result in a starving population, and that the resulting civil unrest would destabilize the entire Balkan region. These arguments were reiterated by Pasok politicians I met, as well as by representatives from prime minister Papademos’ office.
Among the increasingly popular fringe left- and right-wing parties, the only party actually advocating a EZ exit is the communist party, or KKE. The KKE will have just over 10% of the vote in the election in April according to most estimates and refuses to cooperate with any other parties in a coalition. For now, the rest of the political establishment advocates doing whatever it takes to remain in the EZ.
The violent protests in Syntagma Square two weeks ago indicate that there is growing resentment among the Greek public towards the conditions demanded by the troika. Overwhelmingly, however, most Greeks express desperation to stay in the EZ. This is reflected in recent opinion polls: according to a poll conducted in February for Skai TV and Kathimerini, 70% of respondents said a EZ exit and return to the drachma would make Greece’s situation worse and 61% said they viewed the euro favourably.
In addition to concerns about what would happen to their savings and what sort of social unrest would be stoked if Greece exited the EZ, most Greeks are cynical about how a new, independent central bank would operate. They recall that the central bank in Greece before EMU regularly printed money to line politicians’ pockets and encourage favors. If Greece exits the EZ, they expect that kind of cronyism and corruption would flourish once again.
Many Greeks also cited geopolitical concerns as a reason for Greece to avoid leaving the EZ. Greece has not been independent for centuries, and so Greeks feel a EZ exit would bring with it a new power to rule the country.
Doing Business in Greece: An Uphill Battle
While the political elite and public in Greece remain dedicated — for now — to the common currency, it is difficult to see how Greece will manage to restructure its economy and return to growth before either the troika or the Greeks themselves run out of patience. A number of contacts described their experiences trying to open a business or buy property, which involved high fees, several trips to different tax offices and months of navigating bureaucracy. This gets at the very heart of how Greece landed up in its current condition and why rapid change is unlikely. Entire professions such as notaries, lawyers, tax men, architects and inspectors have for years had automatic income in that they have formed the layers of bureaucracy involved in doing business in Greece. At least half of the MPs in Greek parliament hail from these industries, and consequently are incentivized to perpetuate the bureaucracy that impedes opening up, running or finding investment for businesses.
This is best encapsulated in an anecdote from my visit to Athens. A friend and I met up at a new bookstore and café in the centre of town, which has only been open for a month. The establishment is in the center of an area filled with bars, and the owner decided the neighborhood could use a place for people to convene and talk without having to drink alcohol and listen to loud music. After we sat down, we asked the waitress for a coffee. She thanked us for our order and immediately turned and walked out the front door. My friend explained that the owner of the bookstore/café couldn’t get a license to provide coffee. She had tried to just buy a coffee machine and give the coffee away for free, thinking that lingering patrons would boost book sales. However, giving away coffee was illegal as well. Instead, the owner had to strike a deal with a bar across the street, whereby they make the coffee and the waitress spends all day shuttling between the bar and the bookstore/café. My friend also explained to me that books could not be purchased at the bookstore, as it was after 18h and it is illegal to sell books in Greece beyond that hour. I was in a bookstore/café that could neither sell books nor make coffee.
Legislation in Greece has been set up on an ad hoc basis, with laws just layered over — and often contradicting — one another. No one has taken a holistic view of the system and consolidated it. Furthermore, if an investor were to need to turn to Greek courts, the case would not be heard for years. If the investor were foreign, the chances of a ruling in their favor would be extremely slim. It is hard to see how investment will return to Greece unless these issues are addressed, but the government is incentivized to obstruct progress in doing so. There is a lot of discussion among analysts of a Marshall Plan for Greece, but it is difficult to see German companies tolerating such an operating environment.
(3) About the author
Megan Greene is a Senior Economist at Roubini Global Economics, specialising in the eurozone and the euro crisis. She provides political and macroeconomic analysis and forecasting for Greece, Ireland, Portugal, Spain, Italy and Germany. The opinions expressed here are her own and do not reflect those of any employers. Ms Greene offers an independent voice without any political or investment agenda.
(4) Other valuable recent articles about the Greek crisis
- “Default, Exit and Devaluation as the Optimal Solution“, Variant Perception, 16 February 2012 — “Here we look at previous currency breakups, how they happened, and what the consequences are and what the likely outcome is economically for any periphery country that exits the euro.”
- “European Crisis Realities“, Paul Krugman, New York Times, 25 February 2012 — “There are basically three stories about the euro crisis in wide circulation: the Republican story, the German story, and the truth.” Simple graphs tell the story.
- “Greece, ‘The Bottomless Barrel’, As Germans Say” By Wolf Richter, Naked Capitalism, 26 February 2012 — “The plan becomes clear. It is now politically correct to pronounce it in public: Greece should decide on its own to leave the Eurozone. This way no politician outside Greece can be blamed.”
(5) For more information
Forecasting the crisis:
- The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
- Can the European Monetary Union survive the next recession?, 11 July 2008
Other posts about the crisis in Europe:
- The periphery of Europe – a flashpoint to the global economy, 8 February 2010
- A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
- Governments cannot go bankrupt, 2 April 2010
- The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
- About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
- Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
- The Fate of Europe, nearing the point of decision, 13 September 2011
- Europe drifts towards the brink of a cataclysm, 26 September 2011
- Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
- Every day the new world emerges, yet we see it not. Like today, as Europe begs China for loans, 15 September 2011
- Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
- Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
- Where to from here, Europe? Some experts share their views., 8 November 2011
- Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
- Europe begins its endgame. Watch and learn, for Europe’s problems are the world’s., 11 November 2011
- Looking ahead to see the new shape of Europe, 22 November 2011
- Hot news! The Wehrmacht failed to take Greece. Now Germany tries again, with a different method., 28 January 2012
- Europe passes the last exit. A great crisis lies ahead., 21 February 2012
- Europe has chosen a harsh future. All the paths for Greece lead into darkness., 24 February 2012
Wow…powerful warning to the USA is exactly right:
“Entire professions such as notaries, lawyers, tax men, architects and inspectors have for years had automatic income in that they have formed the layers of bureaucracy involved in doing business in Greece.”
AND:
“Many forcefully argued — without any evidence — that Greece doesn’t have a competitiveness problem — despite data suggesting that unit labor costs rose by over 40% in the decade before the crisis — and blamed all of the problems of the private sector on the inefficiencies and tax burden of the public sector.”
These two anecdotes could suffice as a summary of discussions I have had with the same here in the USA.
What was that movie?
Dead Man Walking?
Breton
Good point! Ditto for the comment about the rich Greeks who believe that they should not pay more taxes. Their profits are sacred, their love of country an illusion.
Interesting insights
The mechanics of how OODA loops get locked. Fascinating article. Thanks.
the anecdote about the bookstore is very weird. Bookstores in Greece are open (and selling) until 9pm, not before 6pm as in the anecdote, I’m not sure what’s up with that. Airport bookstores are often open (and selling) 24 hours/day. I live in Greece and after seeing this article spread all over the internet, went to a local bookstore last night just to check. The bookstore owner looked at me like I was out of my mind. “Would I be sitting here burning the lights and paying my employee if I couldn’t sell books? That makes no sense.” So, you know, there’s that…. (And I’ve personally bought books late into the night in many, many parts of Greece.) Don’t let that affect how you interpret such anecdotes, of course. Even if something is wrong, if it sounds correct, we might as well treat it as such, right? I think that’s how this works….
Leave the EURO, return to the Dracma. devaluate, absorb the pain for 1 or 2 or 20 years (interval unspecified), things will stabilize and then after 1 or 2 or 20 years (interval unspecified) things will get better, or so the mandra goes.
Hungary is an example of EU country with a national currency. Is it faring any better???
The truth is that a national currency is not enough if you want to play the “devaluation” game. You also need traditional barriers on free capital mobility, trade barriers (custom control and levies) etc. This of course is equivalent on exiting not only the EuroZone but the EuropeanUnion. Are you advocating a partial or even complete breakup of the EU?
(1) You omit from the solution an important component: default on the debt. Both Greece and Hungary have excess Euro-denominated debt. Probably at levels they can never repay. Devaluation INCREASES the effective value of the debt. Which is why Hungary is not faring “any better” — their measures do not address the key aspect of the problem.
(2) “The truth is that a national currency is not enough if you want to play the “devaluation” game.”
Correct. Devaluation is a policy tool, not magic.
(3) “You also need traditional barriers on free capital mobility, trade barriers (custom control and levies) etc.”
That’s not certain. There is little experience of such situations like that of Greece, as few nations are so stupid as to get themselves in such a fix.
“… as few nations are so stupid …”
Stupid nation? Interesting anthropomorphism probably deeply …uhmmm … scientific?. Well clever people know stupidity is unbeatable in any case …
Sterotypes again and again and again …
Excuse me for wasting your time…
From my comment: ““… as few nations are so stupid …”
Vpep is correct, that was not a precise expression. I should have said “there is little experience of such situations like that of Greece, as few nations have made such a terrible error of judgement.” It was intended to describe this particular action of the Greek people, rather than as evaluation or description of their characteristics (a sterotype). Sloppy writing.
However that is not an an “anthropomorphism”, which means attributing human characteristics to a god, animal, or object.
“Excuse me for wasting your time…”
Corrections are always in order on the FM website.
I used the term “anthropomorphism” liberally as I would in a greek text, after all it is a greek word and I am greek. Anyway, excuse me for my tone. I find it increasingly difficult to be “civil” towards a prevailing attitude which is equivalent to “you messed up, you don’t have the right to speak” kind of thing.
You still blame the “people” though. For example what could the “people” do with respect to the fact that the law of 1953 that regulates ship owning in Greece eventually was referred to in the constitution, actually becoming a part of it. Compare now this fact with the attitude of the ship owner described in your article. To put it simply, a change of that basic law requires a constitutional amendment. It also means that, in a sense, the behaviour of the ship owner is “constitutionally protected”. Interesting eh!.
The main problem with a return to the drachma is the possibility of the complete resurrection of the old “regime”. To put it in somewhat simple terms, the “system” was born in the aftermath two major crises. The post word war II/civil war and the 1974 era (the Cyprus invasion and the transition from dictatorship to democracy). In the turmoil of a return to the drachma and the need to establish some form of “modus operandi” there is an increased chance that the old system will reinvent itself.
Would there be any foreign investments in a “drachma” Greece? No, because even if you “cancelled out” the bureaucracy, the major problem would be the negative outlook in terms of political, social and national stability and security which eventually would force the “experts” to consider such an investment as risky. Or not?
On the other hand, the local economic elite, which has stashed its euros in Switzerland, would find its buying capacity doubled, tripled or even quadrupled in the land of a devaluated drachma and demolished values of stocks, real estate, land. etc. So the “drachma mandra” should include these other very strong political and sociological parameters or else the “means” will kill the “end”. On the other hand within the Eurozone/EU context there is a chance that the “system” will eventually find a new equilibrium point, fiscally sensible and fairer to the greek citizens and the other european tax payers.
There will be more pain in Greece. If the choice is: (a) poor in the EUrozone/EU or (b) poor in the drachma ghetto, as a father of two I choose poverty option (a), as it allows some hope, at least, for my children.
(1) Anyway, excuse me for my tone”
No apologies needed. Your comments were civil and well-expressed. That’s all we ask for on the FM website.
(2) “You still blame the “people” though.”
Yes. Democracy — self-government — is a harsh system. The people are sovereign, so there is no higher authority to blame. You will see the same said of the US on this website.
(3) “Would there be any foreign investments in a “drachma” Greece?”
Is there any now? Other than loans by the troika, which further darken Greece’s future? But history suggests that devaluation will increase foreign direct investment — and (most important) boost experts and tourism.
(4) “the local economic elite, which has stashed its euros in Switzerland”
They will win big no matter what happens from now. That’s a result of what’s already happened, devaluation or stay in the Euro.
(5) “demolished values of stocks, real estate, land. etc.”
Staying in the EMU probably means years of depression, which will crush asset values. As would, in Euro terms, devaluation. See #4.
(6) “there is a chance that the “system” will eventually find a new equilibrium point, fiscally sensible and fairer to the greek citizens and the other european tax payers”
A large number of economists — including those who warned about the imbalances the EMU would create — say that the current measures do little to address the underlying problems. The confidence fairy will not bring magical expansionistic austerity to Greece. A large body of research, including a recent study by the IMF, validates their warnings.
(7) “There will be more pain in Greece. If the choice is: ”
Both history and economic theory suggest that you’ve given a false choice. They are not equivalent choices. More accurately there is the choice of staying in the EMU (hoping to restore competitiveness through internal deflation, which few or no historical precedents) or devaluation/default (harsh, but with many examples of success).
“Yes. Democracy — self-government — is a harsh system. The people are sovereign, so there is no higher authority to blame. You will see the same said of the US on this website”
Absolutely correct. But there is a difference between the responsibility of the electorate and collective labelling of a nation. Being held responsible allows for reform, being collectively labelled leans towards racism and is almost certain to promote various reactionary “ism”s (facism, nationalism, isolationism, etc) Not good for the euro or the drachma! :).
“being collectively labelled ”
By whom? By people in other lands? That’s a fact of life, for everybody, always. Ask folks in Greece about the Turks.
“almost certain to promote various reactionary “ism”s (facism, nationalism, isolationism, etc”
If you are that thin-skinned, then you are toast anyway.
In my opinion, the main problem with Greece is political. I know Greece well enough, speaking the language and having spent there many months on vacations since my childhood. None of the things reported in Mrs. Greene article surprises me as incorrect, except closing hour at 6 p.m. for a store (in Greece, as in Spain, Portugal and Southern Italy, normally stores close at 8-9 p.m., because everybody dines at 9 – 10 p.m.). Greece’s ruling classes are surely responsible for an economic mess.
But the problem is: how can UE ask Greece to give up her sovereignty, while UE is NOT a State, and has no sovereignty of her own? Where is UE army? Where are UE borders? Which is UE’s face, UE’s “telephone number”, as Mr. Kissinger famously said? To sum up, where is UE legitimacy?
UE is asking a sovereign state to give up his sovereignty to a bank, whose autonomous policies are dictated by unelected officials. When you ask (force/blackmail) a state to give up his sovereignty, you take it up, and you step in. You take sovereignty, and you give back, for example, public order, defense of the borders, etc. Here, UE is taking all, and giving back nothing.
If UE were, say, a confederate state as Switzerland, Greece’s economic problems would be UE’s problems, they could be debated in a Parliament where Greek citizen would be represented, and tackled by a government which should take care of Greece’s interests. In the debate about Greek problems, many facets of this matter would be considered: Greece’s geopolitical weight, for example; or Greece’s cultural importance.
In effect, Greece fathered the seeds of European culture; she is the country where the very word and idea of Europe were born: how can you blackmail, humiliate and ruin your father, even if in his old age he took some bad business decisions? Who could respect and trust you, after such a dishonouring conduct?
To sum up: UE has to seriously take some decisions about legitimacy. Who commands in UE? Who/what gives him the right to command? How can UE concretely enforce the said command, i.e., how can UE exist while she is entagled in a political and military alliance with the USA, by which the biggest military power on UE’s soil is NOT an European power?
A sad story, well-worth reading: “Amid Debt Crisis, Athens Falls Apart“, Der Spiegel, 28 March 2012 — Summary:
“Fascist Salutes Return to Greece as Anti-Immigrants Chase Voters“, Bloomberg, 29 April 2012 — Excerpt:
The Golden Dawn party may enter the parliament in Athens for the first time after May 6 elections, current polls show, as rising anti-immigrant sentiment among austerity-hit Greeks spurs support for groups formerly on the political fringes. Ninety percent of people surveyed for a To Vima newspaper poll published on April 9 said immigrants are responsible for an increase in violence and crime.
… The group is known for its violent clashes in immigrant neighborhoods and for a red and black party logo resembling a disentangled swastika. Members of the group have said it’s not Nazi or fascist and they reject any connection of its logo to a swastika, saying it’s an ancient Greek symbol. A video of Golden Dawn leader Nikolaos Michaloliakos shows him giving the fascist salute.
Golden Dawn’s charter says its “main ideal and belief is the nation-tribe” and that “only men and women of Greek descent and consciousness should have full political rights.” Michaloliakos declined to comment for this story when called on his mobile phone. The party wants land mines placed on the Greek-Turkish border to stop illegal immigrants entering the country and cancellation of Greek loan accords with the European Union and International Monetary Fund. It also calls for wiping out debt accumulated since 1974 that’s deemed “illegal and burdensome.” Greek banks that get state funds should be nationalized, as should all natural resources, the party’s program says.
Golden Dawn is bolstering support by organizing security patrols in immigrant-heavy neighborhoods and by running food banks for Greeks suffering from five years of recession and unemployment of almost 22 percent. “I’m voting for Golden Dawn because I want all the immigrants to leave,” Maria Papageorgiou, 52, said in an interview in the Athens neighborhood where she has lived all her life. “There’s a high crime rate, it’s a miserable situation. They should leave and go back to their countries. Or maybe the Germans can take them.”