Greece is a crisis postponed, not eliminated. The country’s economy and its social fabric are unravelling at an alarming pace and the second bailout, combined with a sovereign bond haircut, will do next to nothing to stop the horror show.
The sad truth is that fixing Greece was never the rescue mission’s goal. The goal was to prevent, or at least stem, euro zone debt contagion; to slow the run on the Greek banks for fear that the bank-run could hit other weak countries; to prevent Greece from high-tailing it out of the euro zone and printing drachmas; and to broker a “voluntary” peace agreement with Greek bondholders.The math of the rescue package says as much. Of the €130-billion ($175-billion) in fresh loot from the European Union and the International Monetary Fund, very little is devoted to massaging the Greek economy, now entering its fifth year of debilitating recession, back to life. Most of it goes finance the swap with private bond investors (the “haircut”) and prop up the banks. For example, about €30-billion alone will go for “sweeteners” to convince the private investors to visit the barbershop.
But won’t the haircut help the economy in some way? You would think that knocking a bit less than a third off Greece’s crushing national debt load of €368-billion (the figure at the end of December) by slicing 53.5 per cent off the face value of the privately held bonds would remove a brick or two from the wall of worry. It won’t. While the debt crunch might make the IMF gnomes happy, the economy will remain distressingly uncompetitive.
Labour costs remain too high. The economy is sinfully undiversified and laden with low-value industries, like stuffing tourists onto cruise ships. Corruption is rife. The tax-collection systems are primitive. The professional protection rackets – from truck drivers to doctors – remain intact. The country lacks a working land registry. The bureaucratic red tape leaves entrepreneurs and land owners in despair. An Athens economist told me that the land of a relative was condemned decades ago to make way for a park that has never been built. But the government insists on collecting the property tax even though the land has been unusable and worthless since the writ landed.
As the Greek banks get propped up, and as investors in the sovereign bonds of other countries, like Italy, enjoy value pops in the mistaken belief that the Greek disease is contained, the economy remains in freefall.
This is what the English edition of the Greek newspaper Ekathimerini reported the other day: “As many as 12,000 enterprises are expected to close within the first quarter of the year … The General Confederation of Greek Small Businesses and Traders estimates that a total of 61,200 small and medium-sized enterprises will shut down in 2012 … The jobs lost this year in the sector are estimated at a staggering 240,000, after 150,000 jobs were lost in SMEs last year.”
Yes, the IMF and the EU are pleading for structural and economic reform to make the Greek economy competitive. But forgive us for thinking that reform was an afterthought. If it were a priority, Greece’s second bailout package would have been entirely focused on improving competitiveness instead of propping up the banks and financing a debt swap.
Even though the markets outside of Greece are calm, buoyant even, in the belief that the worst of the Greek debt crisis is over – the euro on Friday went to its highest level since early December – here’s how the whole EU-IMF gamble could backfire.
Greece’s economic collapse means the EU-IMF objective to reduce Greece’s debt-to-gross domestic product to 120.5 per cent by 2020, from about 160 per cent today, is sheer fantasy. Even if the lower figure were attained, it would be unsustainable. Italy, whose economy is far healthier and more diversified, has 120 per cent debt-to-GDP and look how it is struggling.
As Greek society and the economy get crushed, pushing unemployment ever higher – the youth jobless rate is already approaching 50 per cent – the pressure to scrap the euro and print drachmas will only intensify. The polls say most Greeks still favour the euro. Will that remain the case in a year, when hundreds of thousands of more jobs are vaporized and the inevitable riots turn the streets to smoking rubble, as they did two weeks ago in Athens?
If Greece rids itself of the euro, so it can try to devalue its way to prosperity, all bets are off for the integrity of the euro zone. A Greek exodus would trigger an epic bank run not only within Greece, but within the other weak euro zone countries – Portugal, Ireland, Spain, Italy and possibly even France. Banks would collapse, taking the payments system down with them. Portugal and Ireland, realizing that the euro is “reversible,” as Morgan Stanley put it, might decide to bolt from the common currency too. The euro zone could come apart at shocking speed.
Bailing out Greece is not the same as fixing Greece. An unfixed Greece is a grenade ready to go off. The shrapnel will travel far.
Great article, captures exactly what is going on in Greece and why so many experts are skeptical of the second Greek bailout. Even European leaders are skeptical. After German Finance Minister Wolfgang Schauble on Friday, Eurogroup chief Jean-Claude Juncker, too, said on Saturday that Greece may require a third bailout package.
The problems in Greece are far-reaching and highlight the need to reform the civil service. Reuters reports that impatient lenders give Greek inspectors teeth:
Born in Britain to Italian and Belgian parents, EU migration expert Francesca Nastri likes to say she's a true European.
"I cross Europe's north-south divide," she joked this week in her office in the Greek capital, Athens.
But these days it takes more than common heritage to bridge the divide between Europe's rich north and its financially troubled south.
Nowhere is that gap wider than between Greece, probably the continent's most profligate country, and northern nations led by Germany which are funding most of its huge bailout and want to know they are not throwing good money after bad.
Nastri is one of a small team of officials despatched by the European Union to debt-laden Greece to do exactly that. Originally sent to offer "technical assistance", they are now the vanguard of what is shaping up to be an unprecedented experiment in how the EU monitors the affairs of one of its own.
Trust that Greece will deliver on its promises of reform and austerity, set by lenders as the price of rescuing it from bankruptcy, is at rock bottom.
Under the latest EU/IMF rescue endorsed by Greece's euro zone partners this week, inspectors will have unprecedented rights to inspect the country's finances and its efforts to reform with a permanent, beefed-up mission based in Athens.
EU monitoring of Greece started with the technical assistance across the spectrum of government.
Nastri is one of 47 staff, with little more than a dozen currently in Athens and the rest making regular visits from Brussels to help the country in delivering the reforms.
The 40-year-old transferred her skills from the Belgian civil service last year to help the government overhaul procedures for handling migrants and asylum seekers, and to make best use of the considerable EU funds available to do it.
Nastri described her job in terms of flowcharts and spreadsheets - tasks that are "obvious, time-consuming" - helping ministries to hit deadlines and juggle staff under a hiring freeze to keep costs down.
Speaking in an interview, she said her team was helping to share Greece's burden of reform, rather than leaving Athens to do the job on its own. "We can help," she said. "Of course, the Greek authorities can do it, but then we're back at square one - they have to do everything (themselves)."
A senior finance ministry official said two or three experts from the "Task Force" were training staff in the general accounts office and in detecting tax evasion, which is a major problem in Greece. "There are problems of know-how," he said, on condition of anonymity.
UNREFORMED CIVIL SERVICE
Officials in Brussels and within the task force are tight-lipped about the details of the expanded monitoring, saying they are still being worked out.
Dutch Finance Minister Jan Kees de Jager, one of Greece's strongest critics, spoke on Thursday of "measures to promote discipline and implementation of the package".
Greeks have decried the agreement as an attack on national sovereignty but to its lenders, the rationale is simple:
It's no good throwing 110 billion euros ($146 billion) at Greece in 2010, and another 130 billion now, without urgently tackling the fundamental flaws in the system that allowed Greece to accumulate its debt mountain.
This means reforming the pension system, privatisating firms still in state hands, cutting Greece's massive public sector workforce and liberalising closed-shops professions such as truckers, pharmacists and taxi drivers - all in a bid to improve competitiveness and stimulate economic growth.
"The task force is very much in the driving seat in taking forward the implementation of administrative reforms with Greek colleagues," said Caroline Varley, author of a damning report on the Greek public administration.
Varley's December 2011 report for the Organisation for Economic Cooperation and Development (OECD) described a top-heavy structure dominated by senior civil servants, poorly coordinated and permeated by "rent seeking and clientelism".
"There is no systematic record-keeping and a chronic lack of factual evidence and data," it said.
"This has been going on now for the 35 years or so since the end of the dictatorship," Varley told Reuters, referring to Greece's military rule from 1967 to 1974. "There have been some limited reforms but they have never been fully carried through."
Wolfgang Schaeuble, the finance minister of EU paymaster Germany, set the tone earlier this month when he compared Greece with a "bottomless pit".
The comment was part of a flurry of acrimonious exchanges between Athens and Berlin, and reflected deepening doubts among mainly northern members of the 17-nation euro zone about Greece's ability and willingness to change the way it works.
After 13 hours of negotiation in Brussels, finance ministers of the euro zone approved the rescue package on Tuesday, including a deal for private creditors to take a real loss on their Greek government bonds of 73-74 percent.
The bailout saves Greece from bankruptcy on March 20, when 14.5 billion euros in debt repayments fall due.
It came at a price. The task force will become an "enhanced and permanent" presence in the Greek capital.
It should have "stronger on-site monitoring capacity", the text of the bailout deal said, to help Greece's lenders "in assessing the conformity of measures that will be taken by the Greek government, thereby ensuring the timely and full implementation of the programme".
The deal also involves the creation of a ringfenced account where Athens will have to deposit funds to service its debt in order to guarantee repayments.
To many Greeks, it is the latest humiliation after years of being portrayed by critics as workshy and wasteful.
"It's as if we don't have in Greece educated and able people to govern the country," said fruit trader Raptis Michalis. One Greek politician called it "degrading".
The threat of bankruptcy has already dented national pride, and Greeks are angry at seeing their wages, pensions and jobs culled at the demand of leaders in Brussels. Taxes are spiralling, as is unemployment.
Ben May of Capital Economics described the issue as "potentially explosive" for an election pencilled in for April when fringe blocs are expected to make big gains over the two parties currently in government.
The Greek finance ministry official said that "monitoring and information-collecting is fine", but the government would draw the line at decision-making powers. "We are fully transparent. There are no secrets," he said.
Ekathimerini reports that the Greek government is in a race with time in order to meet the deadlines for the ratification of the reforms required for the disbursement of the second set of bailout loans:
Everything must be in place for the March 1 deadline, when the European Union summit begins in Brussels.
Now that the official offer for the swapping of Greek bonds was made on Friday, Athens still has to pass two crucial bills and issue a series of circulars and ministerial decisions.
The concern, among others, the abolition of the extension of validity of expired collective labor contracts, the lifting of the ban on civil servant layoffs, the end to experience bonuses on private contracts and the full application of the single salary system for all state workers.
On Friday Prime Minister Lucas Papademos said the legislative process is continuing at a satisfactory pace.
As I watch this Greek experiment unfold, I wonder how long before the grenade goes off, threatening the social fabric of not only Greece, but Europe and the rest of the world.
Importantly, when are global leaders going to stop the charade and realize the crisis threatening developed economies is an unemployment crisis, not a debt crisis. The debt problem cannot go away with more austerity. If growth isn't factored into the equation, all these austerity measures are doomed to fail.
I am baffled by the course of action policy makers are taking. This is what happens when Goldman Sachs et al. take over government branches. They hijack governments and brutally punish the restless many to serve the financial oligarchs who think the world revolves around their pecuniary interests.
It doesn't and unless leaders wake up and realize that all they are doing is placing a Band-Aid on a mortal wound, the 'Greek crisis' will go global. What happens next? Dr. Oliver Hartwich, a research fellow at the Center for Independent Studies, sees a return to old European rivalries:
The current crisis of Europe has no lack of material tragedies and personal hardship. The periphery economies are in a sharp tailspin, driving thousands of companies out of business. An entire generation of young and educated people in southern Europe cannot find jobs. And for those lucky to remain employed, life is becoming unaffordable because of falling wages and rising prices.
Beyond these visible effects, the fiscal and monetary crisis is causing severe collateral damage to the philosophical constitution of Europe. This is jeopardising the political and economic recovery.
It was always naïve to overlook the reality of national interests and political power plays in EU policymaking. But European politicians at least supplemented realpolitik with more ambitious and idealistic goals.
Democracy, freedom of movement, free trade, the rule of law, international understanding, economic stability, and sound money – such were the values European politicians wished to associate with their grand European project.
But now, all these values – the EU superstructure, to use a Marxian term – have been damaged in the current crisis. Worse than that, the crisis has revealed decades of solemn declarations on “European values” to be mere lip service. When push comes to shove, charity still begins at home.
None of this will surprise lifelong EU sceptics, who have always insisted that a demos, a people, is necessary for democracy to work. In fact, it requires all the elements that constitute a liberal democracy in a nation-state: a public opinion expressed and developed by a free press; a shared sense of purpose and values; a joint awareness of a common history; and a collective understanding and acceptance of the law.
Demos means more than just a random group of people living in a defined territory. It refers to a community that gathers behind these fundamentals of a free public order.
In Europe, such a demos had never developed out of the continent’s multiplicity of demoi. As a result, what is left of European democracy is just the krátos, the power. But power which is not based on shared values is inherently dangerous. “Justice being taken away, then, what are kingdoms but great robberies?” St Augustine asked in the fifth century. His question applies directly to the current state of the European Union.
The economic crisis, a combination of transgressions against EU treaty law and violations of basic democratic principles, has steadily eroded the legal and political foundations of the European Union, and threatens Europe’s future as a place of peaceful and mutually beneficial cooperation. Tensions building up between so-called “EU partners” can no longer be overlooked.
Until this crisis, Europe was functioning on the back of a firm framework of commitments of mutual non-interference in domestic affairs. There were safeguards against fiscal recklessness in other countries via the non-bailout clause in the Stability and Growth Pact. Plus, Europe maintained the fiction that the European Union was a community of equals peacefully working together for a common good.
What we are seeing now is the precise opposite. Non-interference has given way to direct cross-border involvement. In its rather harmless form, it shows in German Chancellor Angela Merkel openly campaigning for the re-election of French President Nicolas Sarkozy, violating all international etiquette and practice. In its more sinister form, non-interference has been replaced by removing elected governments in Italy and Greece and replacing them with internationally appointed caretakers.
European treaty law is no longer sacred, either. The rule of law has been substituted by a “whatever it takes” attitude. Thus, national governments can provide direct financial assistance to other national governments despite the non-bailout clause. The European Central Bank can covertly cover fiscal deficits to help over-indebted governments by direct bond buying or channelling funds through the banks. And in a procedure of dubious legality, institutions such as the European Court of Justice, which belong to the whole European Union, are being used by only a subset of member states.
Worse than these violations of the spirit, if not always the letter, of the laws is the disappearance of the greatest achievement of the European Union. At its heart, the European project was about opening up borders between nations to let people, capital, goods and services flow freely. Where once there were customs officials, turnpikes, and visa and work permits, the European Union had created a common market and a joint EU citizenship. There may not have been much of a European democracy, but there certainly was the promise of a European market.
With growing tensions between EU members these achievements may soon be lost. In the Netherlands, right-wing politician Geert Wilders recently started a website on which Dutch citizens can register their anger about Eastern Europeans living in the Netherlands or “stealing” Dutch jobs. Greeks are burning German flags in the streets as a response to disparaging remarks by German Finance Minister Wolfgang Schäuble. In France, Sarkozy is openly using nationalistic slogans for his re-election campaign.
These incidents are slowly corroding the once celebrated idea of an open Europe. The European project of krátos without a demos has been discredited in the eyes of many Europeans. Their revolt against this political failure at the European level leads straight to the spread of new nationalism and radicalism.
One need not be the European Union's greatest fan to be worried by these developments. Yes, Brussels has all too often been a largely undemocratic, elite-driven, technocratic and bureaucratic monster. True, the experiment of a common currency for the continent has failed spectacularly.
But make no mistake: As the old European Union crumbles under the current crisis and its own contradictions, there is no guarantee that what will follow will be any better.
Europeans may one day wake up in an environment of revived national rivalries, new political extremism and a continent without the open borders they once took for granted. This could be a tragedy even worse than the economic turmoil the continent is experiencing at the moment.
I do hope that a return to nationalism isn't what awaits us in Europe and elsewhere. Unfortunately, the brutal economic repression of entire countries to serve the interests of the financial elite will all but ensure this.
Below, Lauren Lyster of the Capital Account reports on the rise of nationalism in Greece and interviews Nigel Farage, outspoken critic of eurozone policies and perennial eurozone skeptic.
Mr. Nigel comments: "I do not want a rise of extreme fascist nationalism in Europe but I am terrified that the EU itself is now so powerful and so determined to keep on with its own failing policies that we may well be driving people into this position." I fear Mr. Farage is right and a revolution will take place in Greece and the rest of the world.