Some Home Truths About Greece and the Euro by Bill Peddie

Those who are surprised how far Greece appears to have fallen in its ability to weather their current economic crisis are either new to the scene or have very short memories.

If we were to cast our minds back to Greece entering the European union in 2001 we might for example remember that Greece did not enter the Euro Zone with a recent tradition of wealth or stable production. For the last few centuries, Greece has had a reputation for being a small agrarian nation with strategic geographical and historical importance and little else. Although there is a comparatively wealthy elite, it is also a nation gripped by tribalism, xenophobia, characterised by superstition and provincialism and with virtually no tradition of modern industry or balanced economic sophistication. Older readers may remember Greek shipping magnates operating huge fleets of old leaky cargo boats and fuel tankers, while property millionaires enlarged their fiefdoms. As an aside, when my wife and I visited Greece as tourists in 2007,property developers were apparently setting fire to ancient protected forests to gain access to previously inaccessible land while angry protests in Athens appeared to be unsettling the tourists. The fact that Greece continues to export vast quantities of olives to Germany, where German industry extracts the oil and makes a substantial profit on exporting the oil says a good deal about the two nations’ respective attitudes to development.

There has been no shortage of intelligent suggestions about remedying the damaged economy yet each reform suggested has been strenuously resisted by private interests and the publically owned energy sectors.

Although there was some support in 2000 from the main European nations for incorporating Greece into the European Union, it was always going to be a mixed blessing at best. Substantial Greek debts at the time dating from the 1999 Greek stock market crash and the numerous financial scandals which emerged in its aftermath meant that only the intervention of Goldman Sachs’ enabled a clever and complex restructuring of the equivalent of $10 Billion debt swapped for a lower interest Euro debt. The extent of the real debt remained essentially hidden from the key decision makers when Greece entered the Euro Zone in 2001.

When the Wall Street crash of 2008 sent the World economy into a tail-spin the cracks in the Greek economy widened and by October 2009 the Greek government was forced to admit they had been misreporting the size of their deficit for years. The backlash from the lenders was immediate. Other European banks got rid of their Greek bonds and distanced themselves from Greek interests. Promised loans were reduced or denied and by 2010 Greece was on the edge of bankruptcy.

Because the Euro was being positioned as a stable international currency and the European Union as an organization which enabled its member states to grow and prosper, the so-called troika of the International Monetary Fund ( IMF), the European Central Bank and the European Commission then combined to offer two substantial bail-out loans totalling 240 Billion Euros. Unfortunately by the time this bail-out package had been assembled, most of the money had to be set aside for repaying loans to the increasingly edgy foreign debtors (only 20 Euros out of each one hundred Euros was available for growing the Economy) . In addition the standard internal adjustment used by nations in trouble, namely devaluing the currency, was not available in that the Euro was a common currency.

One result was that foreign banks divested themselves of Greek bonds and assets, unemployment has steadily increased to more than 25.5%, pensions started to drop in value at the same time the age for pensions increased (currently set at 67), while the debt to GDP ratio increased until it reached 177%. The Greek Syriza-led Government was elected on a policy of securing sufficient bailout to retire half of their Government debt. Perhaps understandably the other Euro Zone countries which hold a good portion of the current debt see absolutely no future in increasing their loans when there is no sign that Greece even has the ability to manage the current deficit.

The Greek Government is correctly pointing out that since the current austerity measures are causing much hardship, to implement the Euro Zone demands for more austerity would cause much social damage. Already largely as a result of the high unemployment of young people, the disenchanted young are turning to drugs while HIV is rocketing. Unfortunately the increase in drug use comes at the very time when a cash strapped government is withdrawing funding for programmes to rescue young people from addiction. The British Medical Journal reports a significant increase in Greek youth suicide. The present crisis is serious and may yet result in the total collapse of the Greek economy. In this last week the run on bank funds has meant that many are denied living incomes. For example for a good many, the 60 Euro a day for the elderly barely covers the cost of medication because the Government no longer has the ability to subsidize essential drugs. The wider economy is also suffering in that businesses who depend on banks for paying their bills have in effect frozen the money and as a consequence businesses are experiencing an acute cash crisis.

The Euro Zone now has a series of difficult decisions to make. To allow the Greek economy to collapse may in reality cost more than subsidizing the bail-out in that the Euro will be perceived as less safe and devalue as a consequence. Since the Greek economic woes on paper at least are less than 1% of the total economic concerns of the Euro Zone, devaluation of the Euro may pose a bigger risk, and radically affect every trading partner with European markets. One the other hand to allow Greece to get away with their threatened default is also unpalatable in that others (perhaps Portugal and Italy) might follow suit.

Regardless of the current outcome, Greece itself faces some urgent problems. The genuine areas of potential growth require a radical restructuring. Two areas which seem to show promise is developing Greece as a shipping hub, and rather surprisingly, encouraging further development of the surprisingly lucrative petroleum products trade.  Some need rather more urgent attention.  For example tourism is one of the few bright spots in the economy yet in effect encouraging protests and closing ATMs is the very thing to drive tourists away.  The alternative of expecting tourists to arrive carrying cash and having them wander the town amongst poor and desperate people is hardly calculated to encourage tourism development.  Allowing the rich to hold the rest of the economy to ransom is currently inappropriate while encouraging the radical protest parties like Golden Dawn and Syriza to impose solutions focussing on narrow sectors of the economy seems calculated to further undermine the European experiment.

(Comments would be welcomed)

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