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.
- 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.
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