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Greece and the euro: The flight of Icarus
Over the last three years, you won’t have read a newspaper article, seen a TV report or listened to a radio program that referred to Greece and didn’t use the word “crisis.”
And for good reason too: the problems triggered by the Greek debt crisis have sent the country’s economy into freefall, destabilized its political system and thrown its society into turmoil. Beyond Greek borders, the crisis has threatened to destroy the euro, pull apart the European Union and cause global financial havoc.
When one considers that Greece accounts for less than 4 percent of the eurozone’s total debt or GDP, it’s easy to see how unprepared everyone was for the current situation.
My main focus today will be on Greece, outlining how it got into this mess and where it goes from here. I will touch on some of the implications this has for Europe as a whole.
The reason I want to concentrate mostly on Greece is because I think there have been – and continue to be – a lot of misconceptions about what caused this crisis and how events have evolved there over the last few years.
One of America’s most famous publishers, William Randolph Hearst, who also owned newspapers in this city, said: “News is something somebody doesn’t want printed; everything else is advertising.” I can tell you this crisis has been no advertisement for Greece. A lot of revealing things have been written and said about the country. It has been painful for Greeks to have their dirty laundry aired in public.
Some of the reporting during this crisis has been of the highest order, providing insight into a complex problem, but some has resorted to clichés that hinder people’s understanding of the situation.
For example, if I were to tell you there was a country in Europe where hardly anybody paid their taxes, where hard work was frowned upon, where people were able to retire on ample pensions in their 40s, where most of the workforce was employed in the civil service and where public spending reached unrivalled levels, I’m guessing the first thing that would cross your mind is that I’m talking about Greece.
Perhaps the second thing you might think is: “How soon can I move there? It sounds like a comfortable place to live.”
But I’m also guessing that if I told you there was a European country where the majority of citizens pay without fail some of the highest taxes in Europe, whose black economy was not even the largest in the eurozone, where employees worked among the longest hours in the EU, where the average retirement age was the same as in Germany, where most pensioners earn less than 800 euros (or 1,000 dollars) a month, where civil servants make up less than 20 percent of the workforce and where public expenditure was about the EU average, perhaps the last country you’d think of would be Greece.
Too often over the last few years, stereotypes, conjecture and anecdotes rather than measured analysis have influenced media coverage and the public debate about Greece. Even the eurozone’s decision-making process has been affected at times, with policy makers disregarding the facts to present a skewed version of what has happened in Greece in order to support their preconceived ideas about fiscal or economic policy. The subject of Greece has even been used misleadingly as a salutary tale in the US presidential campaign.
If some of the myths that are perpetuated about the Greek crisis are to be dispelled then it’s vital that we improve our understanding of the factors that contributed to the current economic collapse.
This is what I hope to help with over the next few minutes.
For this, we will need another Greek word. So, let’s leave crisis aside for now and consider the word hubris, or ύβρις in Greek. Hubris is the word ancient Greeks used to describe when someone’s extreme arrogance led to them losing touch with the world around them.
No story sets out the perils and penalties of hubris as well as that of Icarus, the young man who ignored the warnings of his father, Daedalus, flew too close to the sun with his wings of wax and feathers and then fell to his death.
This is a fitting analogy for what happened to Greece over the last decade or so; the period covering its membership of the euro.
The reason that Greece finds itself in the impossible position it’s in today is the result of years of political, economic and institutional failure – weaknesses that membership of the European Union and then the euro were meant to fix but in some respects actually exacerbated.
Joining the European Monetary Union was Greece’s chance to take flight and soar above the problems that had dogged the country for decades.
The euro was much more than an economic project for Greece. Few European countries had as tumultuous a post-Second World War experience as Greece. It was a period marked by civil war, military dictatorship, political antagonism, poverty, famine and mass emigration, as some of the people in the audience today will know very well.
Greece saw joining the euro as part of strategy to be firmly ensconced within Europe and its institutions. It was a continuation of the decision to join in 1981 what was then the European Economic Community and a way to anchor itself to Europe, thereby providing its people with the stability and prosperity they had been denied for decades.
Between 1981 and 2001, when Greece joined the euro, per capita income in Greece had almost tripled. From 1984 onwards, Greece enjoyed almost uninterrupted positive growth rates each year. Europe was good for Greece and its economy. Also, the euro would theoretically solve one of the perennial problems of the Greek economy: inflation. The whole philosophy of the single currency was based around the idea of maintaining price stability, something Greek governments had failed at repeatedly.
But the importance of the euro as a political and economic project meant danger signs were not heeded.
The focus placed on fiscal indicators as a measure of whether countries were ready to join the euro meant structural factors were overlooked. A period of belt-tightening before euro entry saw Greece’s public deficit and debt fall. This satisfied European policymakers that Greece was on its way towards converging with the other economies.
This proved a monumental miscalculation. The idea that fiscal indicators alone can define convergence was later exposed as one of the biggest flaws in the euro’s architecture.
For Greece, giving up control over its monetary policy meant it could no longer rely on devaluations to regain its competitiveness as it had done several times in the previous decades. Competing with the likes of a resurgent German economy meant it had to be competitive on all levels, not just superficially.
However, a self-serving political system failed to address key problems such as bureaucratic barriers to entrepreneurship, an inefficient public administration and an outdated economic model in which the state was omnipresent.
The two-party system that had dominated Greek politics since the fall of the dictatorship in 1974 had been responsible for creating numerous rigidities. Socialist PASOK and conservative New Democracy, which together enjoyed roughly 80 percent of the vote in elections since the early 1980s and interchanged in government, engaged in a longstanding exchange of favours that involved public sector jobs and contracts being handed to party supporters.
These political parties had become the main channels through which business was conducted in Greece. Their cronyism stretched its tentacles into the judiciary, the police, the armed forces and most other significant institutions.
This practice built an ineffective public sector, fed a largely reactionary labour movement and compromised parts of the private sector, where the dominance of oligarchs in key areas prevented healthy competition and created cartels in product markets as diverse as milk, fuel and even potatoes.
Efforts to introduce structural reforms, such as an overhaul of the pension system in 2001, were repeatedly abandoned by politicians unwilling to confront the monsters they’d created. The traditionally partisan Greek media became increasingly beholden as it got caught up in this swapping of influence and money between the public and private sector. Coupled with the absence of a functioning and independent civil society, this allowed major inequalities to go unquestioned.
What Greece should have been aiming for as it entered the euro was an efficient public sector, a private sector that embraced innovation and production and a competitive services sector – particularly in terms of tourism, which accounts for about a fifth of the Greek economy – and a growing exports sector. Greece ended up with none of these.
This is where hubris comes into play. An increasingly arrogant and out of touch political system and a population appeased by the apparent prosperity euro membership promised failed to see the warning signs. Cheap money papered over the cracks.
The markets treated Greek government debt as being almost as safe an investment as German bonds. Borrowing costs for Greek citizens also declined sharply. As a result, Greece began posting growth rates of 4 percent and above – among the highest in the eurozone.
It was false prosperity. In reality, Greece’s wings were disintegrating. Prices were rising at almost twice the rate of the eurozone average. Businesses, but mostly the government, soon began increasing wages to counter this effect.
Between 2000 and 2009, employee compensation in Greece rose by 23 percent compared to the EU average. During the same period, wages in Germany fell by 18 percent against the European average. Greek wages remained low by eurozone standards but the rise eroded competitiveness and fiscal stability even further.
Worse still, this extra income was largely going towards boosting consumption. By 2006, personal consumption in Greece was almost double what it was before the country joined the euro. The housing market also enjoyed a boom, later to become a bubble as Greek banks were able to borrow cheaply from the European Central Bank and issue mortgages relatively freely. The ECB accepted the Greek bonds it received as collateral as being virtually risk free.
To compound the problem, more money was being spent on imported goods. When Greece joined the euro, it was importing about 3 billion euros of good per month. By 2008, that figure had doubled. This was compounded by the fact that exports remained stagnant by comparison. When Greece entered the euro, it exported 1 euro for every 3 it imported. By 2009, this ratio had worsened slightly.
Here, another flaw of the euro was revealed. The architects of the currency discounted the possibility that disparities in country’s balance of payment performances would have a destabilizing effect. The prevailing thinking was that current account deficits would be mostly self-financing.
On a political level, the once-mighty PASOK started to enter a period of terminal decline. During the late 90s and early part of the last decade, it had moved away from the populist policies of its founder Andreas Papandreou – the man credited with starting the process that led to the size of Greece’s civil service doubling in three decades. Under the leadership of Costas Simitis, PASOK favored a more reformist approach, one that was inextricably linked to the ultimate goal of euro membership.
But after clinching a place in the single currency, PASOK’s reformist drive hit a brick wall. It lacked the conviction to make the tough changes in the public sector, to make the pension system viable and to really attack corruption. Simitis’s premiership fizzled out and he was replaced in 2004 by Greece’s youngest Prime Minister, Costas Karamanlis.
He had spent several years reshaping New Democracy and said he was committed to fighting corruption and reforming the public sector.
In reality though, his ideas proved nebulous. With the alarm bells starting to ring, Greece needed a concrete plan to put its economy on a more productive and viable path. It needed a crisis management team but instead got a set of politicians that flew even closer to the burning sun.
2004 has gone down in history as a “golden year” for Greece. Its soccer team beat the odds to win the European Championship and Athens pulled off the successful hosting of a memorable Olympic Games.
The glory was fleeting. Within a few months of holding the Olympics, Greece became the first EU country to be placed under fiscal monitoring as part of the EU’s Excessive Deficit Procedure. The public deficit had reached 7.4 percent of GDP when the limit for the eurozone was 3 percent.
Greece’s debt was more than 100 percent of GDP – the second highest in the EU. This should have been a cause for alarm in itself but the government was still borrowing cheaply on global markets, which at the point had supreme confidence in the euro and chose to overlook Greece’s economic deficiencies.
Among the economic indicators pointing to trouble ahead was Greece’s current account deficit. It was already at almost 11 billion euros in 2004. The failure to address this led to it soaring to nearly 33 billion euros by 2007. It had tripled in just three years.
Rather than tackle the weaknesses, the New Democracy government fed the problem with more hirings and higher spending financed by more borrowing. Greece’s public debt jumped by 56 billion euros between 2004 and 2007.
So, when the global financial crisis struck in 2008, Greece was woefully unprepared. Karamanlis took the narrow view that this would only be a banking crisis and assured Greeks that their country was “fortified” and would withstand the shocks. Yet, at the same time, his government was running a deficit of 9.8 percent of GDP and was financing this by borrowing from increasingly jittery markets, where credit was drying up.
Time ran out for Greece in late 2009, when national elections led to PASOK taking over from New Democracy and admitting that the deficit for that year would come to more than 12 percent, rather then the 6 percent that had been previously forecast. This triggered a chain of events that led to Greece being shut out of the markets. In early 2010, the EU and the International Monetary Fund joined forces to create the first bailout of its type to prevent a disorderly Greek default.
Bigger economies than Greece, such as Russia and Argentina, had defaulted in previous years but the level of exposur European banks had to Greek debt and fears of contagion from a bankruptcy in Athens drove the EU and IMF to come up with a different solution. It also proved to be seriously flawed.
The frontloading of austerity measures and the slow pace of reforms formed a damaging combination. Both Greece and its lenders must take the blame for this. Greek governments shied away from some of the reforms that would involve clashing with the special interest groups politicians had bred for many years. The EU and the IMF, meanwhile, miscalculated the impact that the largest fiscal consolidation program undertaken in the developed world would have on a faltering economy.
Only a couple of weeks ago, the IMF admitted that it underestimated by more than 100 percent the recessionary impact that spending cuts – the so-called fiscal multiplier – would have on the Greek economy.
Roughly 2.5 years on from signing the EU-IMF loan agreement, Greece is suffering. It is poised to complete its fifth year of recession, with more consecutive quarters of economic contraction than the USA had during the Great Depression. The economy has shrunk by more than 20 percent since its peak in 2008 and is expected to contract by another 5 percent next year.
The unemployment rate has passed 25 percent. One in two people under 25 are without a job and have diminishing prospects of finding one. Over the last three years, salaries have fallen by 19 percent compared to the European average, the minimum wage has been slashed by 22 percent, and pensions by almost 40 percent. In the meantime, income tax, value added tax and property tax have all risen substantially. This year, Greeks have so far paid 450 percent more in property tax than they did last year.
In contrast, the cost of basic goods has not fallen and some, such as gasoline and heating oil, have skyrocketed.
This situation is not sustainable economically, politically or socially. But Greece finds itself trapped. Its only source of funding is the loans it receives from the EU and IMF. To receive these loans, Greece has to agree to more spending cuts and tax hikes.
The latest austerity package being negotiated is for 13.5 billion euros, or about 5 percent of GDP. The EU and the IMF want about 9 billion euros worth of measures to be implemented next year. It’s certain that cuts of this magnitude in an economy that’s still contracting rapidly will have a devastating impact.
But throughout this crisis, Greek policy makers have had no answer. The country is going through a painful political transition and there is a lack of good ideas and able or willing personnel.
Only the eurozone and the IMF have the power to break the never-ending cycle of debt, austerity and recession. At the moment they seem reluctant to do so.
The IMF is pressuring the Europeans to agree on a way of making Greek debt sustainable, otherwise the Fund will pull out of the program. The fact that the Greek economy is shrinking so rapidly and that the majority of the 240 billion euros ($310 billion) from its bailout is going towards repaying existing debt means the amount Greece owes has actually risen rather than fallen over the past couple of years. Figures this week showed Greek debt to be at a staggering 170 percent of GDP despite the fact that privately-held debt was restructured earlier this year.
In order for this debt-to-GDP ratio to fall to manageable levels, official sector debt will have to be restructured. This means the eurozone lowering the interest rate and extending the maturities on the loans it has made to Greece and the European Central Bank, which holds about 45 billion euros of Greek debt, accepting that it will not be able to make a profit on that investment after mopping the bonds up from the secondary market at a discount. A move to ensure that the 50 billion euros needed to recapitalize Greek banks does not pass onto the national debt would also help.
With Portugal and Ireland already having been bailed out and Cyprus and Spain heading in that direction, the eurozone faces some tough choices. It needs bold economic decisions but above all political courage. Sadly, this has been distinctly lacking over the past three years.
Too many key decision-makers in Europe have been content to allow this crisis to develop into a morality play in which the South plays the reckless grasshopper to the North’s frugal ant. This has allowed them to dodge questions about how the euro was structured, who profited and why banks in the eurozone’s core were so undercapitalized and so overexposed to the single currency’s weaker economies.
It has also left unanswered perhaps the most crucial question of all, which is how the eurozone can balance the need for fiscal consolidation and structural reform with the absolute necessity for growth.
The Greek crisis and the events that have unfolded over the last few years have proved an existential moment for Europe. This is the time when it will have to decide whether Union means marriage, as in “for better or worse”, or whether it describes a much looser association.
The tools are being put in place to strengthen the architecture of the euro and bind countries closer together. The European Stability Mechanism (ESM) – a permanent crisis fund – has been given the green light, stricter budget rules are in place, greater powers of oversight have been granted to the European Commission and a banking union, with a central watchdog, will be ready next year. The idea of debt mutualisation, or Eurobonds, is also on the table.
These are significant steps but it doesn’t change today’s reality, which is that many people in Greece and other countries like Portugal and Spain are losing hope. Mistrust and resentment between the people of the eurozone core and periphery is rising. This threatens the European project, whose main aim was to prevent nationalism and conflict. The tone that European leaders take and the decisions they make over the next few months will decide the fate of the EU and the euro.
In the meantime, Greece must cling on amid increasingly difficult conditions. Beyond its serious economic problems, the political situation is finely balanced. Greece went through tumultuous elections this summer that saw support for New Democracy and PASOK cut in half. The once-sworn enemies received enough votes to form a coalition with a third party called Democratic Left. The government’s task is an unenviable one. Its international lenders are demanding it continue with unpopular austerity measures for at least another two years, while also pushing through reforms at an unprecedented pace.
Opposing it are SYRIZA, an anti-austerity leftist party on the rise, and Golden Dawn, a racist far-right party that has come virtually out of nowhere to win 18 seats in Parliament. Greece is now witnessing fascists attacking migrants and other minorities in city streets with the police either unwilling or incapable of intervening. This has only added to the political and social tension and the sense that we are in desperate times.
The strain of unemployment is showing as families run out of money and lose access to benefits and healthcare. More people in major cities are turning to charities for food, medical care and medicines. Some hospitals are closing, universities are running out of money and even some school buses are being put out of service. This is a dramatic change for a society that thought it had entered its most prosperous era just a few years ago.
Convincing Greeks that recovery is attainable is becoming a harder job every day.
However, there are some signs of improvement. Despite the impression that Greece is missing its fiscal targets, it has managed to make substantial inroads into its deficit as a result of the cuts made since 2010. Figures published this week showed that the primary deficit was reduced to just 2 billion euros in September. It is worth noting that the primary deficit when the crisis started was 8.5 percent of GDP. Data also showed this week that Greece posted a current account surplus for the second month in a row in August.
Public spending has fallen dramatically and the government wage bill has been trimmed. The number of civil servants is on the way down and some gradual advances are being made through the use of better know-how in reducing tax evasion, which remains a key problem in some sectors.
Some of the reforms aimed at making Greece an easier place to invest and start a business are starting to pay off. In the World Bank’s annual “Doing Business” report published this week, Greece was among the countries with the biggest jump in rankings, moving up from 100th place to 78th.
Another bonus over the last few weeks has been that speculation about Greece leaving the euro has died down somewhat. For three years, Greece has had to live with almost daily speculation by the media, analysts and European politicians about whether it will have to return to the drachma. This has proved psychologically draining domestically but has also scuppered any chances of investors thinking seriously about backing much-needed projects in the country.
There is a long way to go on all fronts and if the key players in the eurozone approach the challenge facing them as an economic problem rather than a moral quandary, where supposed sinners have to be punished, there is some hope that the positives I’ve described will be form green shoots of a slow recovery.
From Greece’s perspective, it must continue with structural reforms, particularly of its public administration. There has been too much focus on relaxing labor regulations that are already among the loosest in Europe. Only minimum wages in Portugal are lower than in Greece and salaries for under-25s are actually set below what is considered to be the poverty line.
The focus has to be on evaluating staff in the public sector, shutting down organizations that serve no purpose and increasing the expertise and efficiency of key departments. Equally, liberalizing professions protected by anachronistic barriers to entry and tackling cartels will help boost competitiveness and go some way to creating a sense of fairness in society.
Then, Greece must find ways of nurturing the productive sectors of its economy and tapping into the impressive human resources it has. Greece has yet to realise its potential as a tourism destination, for instance. It has suffered from a jumbled strategy over the years as other nearby destinations like Turkey and Croatia have developed more coherent and effective plans. A revival in agricultural production is also a possibility.
But Greece also has hi-tech potential. Statistics show that young Greeks tend to be educated to a higher level and speak more languages than the European average. Greece also has a high proportion of university graduates. In some areas such as ICT and Internet-based start-ups, young, educated Greeks have being putting their skills to good use and a cottage industry of firms that are exporting their products and know-how is developing.
Ultimately, it’s in the hands of this young generation that the future lies. They’re better educated and better travelled than their parents, far more in tune with how successful economies function and how the world around them works. For now, power in Greece still remains in the hands of the older generation that failed the euro test. But as we go through the current political transition, there is an opportunity for new voices to heard and new ideas to be aired. If – and it’s a big if – Greek society is able to survive this crisis, then a new generation of politicians, entrepreneurs, activists and opinion makers has the opportunity to reshape the country.
When thinking about the story of Icarus, people often forget that while the young man crashed to the ground, the older Daedalus made it home safely. Greece is being called upon to reverse this, with the younger members of its society being the ones who set aside the folly and failure of their elders and make it over to the other side. Their goal must be to ensure that Greece is associated with much more positive words than crisis or hubris in the future and that when foreign politicians talk about the possibility of their own country “becoming like Greece,” it’s to inspire their people rather than to frighten them.
* This is the text of a speech given at the Chicago Council of Global Affairs on October 25, 2012